July 2021 system loan grew by 3.1% YoY but was flattish MoM, owing to lockdown measures impeding applications, disbursements and repayments on both household and business loans. As a whole, system gross impaired loan (GIL) ratio once again peaked at 1.67% (+5 bps) as the pains from the FMCO weredealt onto borrowers.That said, deposits are still seeing favourable growth (+4.5% YoY, +0.5% MoM) with the CASA-to-deposit ratio maintaining its 30.3% level. We see July 2021 to be an outlier as restrictionswere progressively lifted in Aug 2021,whichwould likelyleadto further easing in the nearterm. The progressive rise in vaccination rates appears to be encouraging and hopefully it will be soon before we can achieve herd immunity for a more sustainable economy re-opening by 4QCY21. We keep our systems loans growth expectation at 3-4% and deposits growthforecastof 3-4% unchanged, premised by higher spending to come. Maintain NEUTRAL on the banking sector with MAYBANK (OP; TP: RM10.65) as our preferred pick forits market leading position anddividend safety for investors.

Expectedly slow July2021.YoY,system loans increased by 3.1% and thisstemmed mostly from household loans (+4.2%) to fuel private vehicle and property purchases. Business loans meanwhile only grew by 1.7% as sectors saw mixed restrictions which made operations and expansion difficult. MoM, total loans was almost flattish at 0.1% for both household and business loans, which was understandable given restrictive FMCO implementations. Additionally, with the introduction of an opt-in blanket moratorium effective 7 July 2021, MoM loan repayments saw a 2.2% drop (-4.7% in household and-1.5% in businesses)as individuals cling on for more cash liquidity. (refer to Table 1-3 for breakdown of system loans). For now, we are sticking toour CY21 system loans growth expectation at 3-4% with the steady re-opening of economic sectors with hopes of more liberal nationwide activities when all states migrate to Phase 2 of the FMCO. This is encouraged by the high vaccination rates so far, with 63.6% of the total population being completely vaccinated.

Loan applications smacked down (-28% YoY,-15% MoM).Due to the same abovementioned reasons, households and businessesfacedsevere difficulties in seeking out loans, and possibly with the trying business climate disincentivising further operations. This cascaded to lower loan approvals (-16% YoY, -11% MoM) 

Impairmen tremain peakish.InJuly 2021, total impairments reported a 20% YoY growth, heightened by both household (+37%) and business (+11%) loans. Household defaults are likely stirred by those with lost income sources while businesses suffered due to unsustainable operating environments that impeded sales. In terms of GIL ratio, overall the month registered at 1.67% (+5 bps MoM) with household coming in at 1.18% (+7 bps) and businesses at 2.36% (+1 bps). That said, banks are continuously keeping their buffers high, coming in with a loan loss coverage ratio of 111.5% (June 2021: 111.9%, July 2020: 95.5%) to prepare room in the event of further worsening (refer to Table 6-7 for breakdown of system impaired loans).

CASA was stable inJuly 2021at 30.3% of total deposits, whichincreased by 4.5% YoY with a slight 0.5% MoM boost.Possibly due to movement restrictions, consumers are less able to capitalise on their excess cash which were hence left dormant. Meanwhile, other interest-yielding accounts could appear less appealing given the suppressed interest returns at present. For CY21, we anticipate deposits growth to ease to 3- 4% with a CASA mix of c.30% as spending-fuelled withdrawals could pick up aggressively as the economyfurtherre-opens. Meanwhile, system LDR is slightly lowerat 86.0%(-0.6ppt)with CET-1 ratio rising to 14.70% (+47 bps) as banks accumulate capital in anticipation of future dividend payments.

Maintain NEUTRAL on the banking sector. July 2021’s numbers reflect the prevailing damage that movement controls and restrictions could inflict on the overall economy and could lead to a compounding impact if there are extended excessively. As far as Aug 2021 is concerned, we believe there will be some relief, given some loosening of such measures, but much more could be needed to demonstrate a meaningful improvement. In unison, all banks are anticipating some headwinds in asset quality and hence forewarned the need for more impairments. That said, with vaccination rates on the rise, we are hopeful that the number of new daily Covid-19 cases would gradually improve to a more economy-friendly level by 4QCY21 and that would give us the necessary kicker to boost confidence once more. For investors still seeking a position, we continue to advocate MAYBANK (OP; TP: RM10.65). Its industry-leading dividend yield (6-8%) and dividend-to-ROE provide sizeable buffers for investors seeking a long-term play amidst ongoing macroeconomic uncertainties. Additionally, its GIL ratio is fairly within the industry average of c.2% which indicates that the bank has sound asset quality measures despite being the market leader in domestic share financing

Source: Kenanga Research - 1 Sept 2021