Sep 2021 system loan rose by 2.9% YoY with a MoM increase of 1.0%. This is within our expectations, in line to achieve our CY21 loans growth target of 3-4%. The sequential uptick is thanks to more robust economic activity leading to encouraging improvements in business loans. Loan disbursements and repayments both rose but application from business loans saw a MoM decline of 10%, which we believe was due to tapering from the pent up applications in Aug2021 in anticipation of a more business friendly environment. Industry-wide gross impaired loan (GIL) ratio recovered to 1.57% (-10bps MoM) mainly driven by businesses while households saw a marginal increase. Total deposits were up 1.6% MoM but CASA-to-deposit mix dippedto 30.3% (-0.1ppt) as non-CASA options were favoured this time around. We expect the positive momentum on loans growth to continue and deposits to taper as consumption increases with economyreopening. In the recent tabling of the Budget 2022, our Minister of Finance shared several initiatives which should support next year’s economic pillars via job creation as well as household and business aids. However, the one-off 33% prosperity tax for 2022 would ultimately dampen the banks’ earnings recovery, leading us to lowerour CY22 CNP expectations by 5-14%. Following some slightchanges to our TPs, our top picks are still intact, being: (i) MAYBANK (OP; TP: RM10.55) for its dividend safety; and (ii) RHBBANK (OP; TP: RM6.10) for its participation in the digital banking license bid. Sentiment-wise, we are cautious on potential NIM pressures that could affect the long-term profitability of the sector; hence, we keep our NEUTRAL call for the sector.

Rebound inSep2021. YoY, system loans increased by 2.9% as both households (+3.2%) and businesses (+2.6%) enjoyed looser restrictions as opposed to the preceeding year. On a MoM basis, there was an uptick of 1.0% which is strong consideringthat prior months were suppressed by lockdown measures. While household loans kept its steady growth of 0.6%, business loans perked up by 1.5% in a less hostile operating climate. This is also reflected in loans disbursements which shot up 22.7% MoM following better confidence with the economy. Loan repayments stayed positive (+2.8% MoM) as cashflows are now more stable (refer to Table 1-3 for breakdown of system loans). We maintain our CY21 system loans growth target of 3-4% for now, as we believe the easing restrictions would translate positively into demand for loans in 4QCY21.

Loan applications reinvigorated (-6% YoY, +12% MoM). There was a decline as opposed to the prior year’s period, mainly due to the household front (-11% YoY) which could have been due to pressing uncertainties, although some businesses (+2%) sought more cash for working capital purposes. Against Aug 2021, households led (+32% MoM) but business loan applications fell (-10%) but we suspect this to be due to the pent-up applications in the previous month as businesses planned ahead (refer to Table 4-5 for breakdown of system loan applications).

Impairment softened. Sep 2021 total impairment was 17% YoY but managed to decline by 5% MoM. It was household loans that saw higher impairments (+50% YoY, +1% MoM) as 2020 was aided by the first blanket moratorium. Overall GIL came in at 1.57% (-10 bps MoM) which was last seen in Apr 2021, led by businesses. That said, industry loan loss coverage remains high at 120.5% (Aug 2021: 113.3%, Sep 2020:105.2%) as banks remainedcautious and selective in the event of another unforeseen downturn (refer to Table 6-7 for breakdown of system impaired loans)

CASA easing but deposits are still growing. As of Sep 2021, total deposits continued to expand (+5.0% YoY, +1.6% MoM), possibly as liquidity savings from the moratorium was reinjected. However, CASA seems to be losing some favour as its proportion fell to 30.3% (Aug 2021: 30.4%, Sep 2020: 28.6%) as depositors opt for longer term alternatives this time around. We keep our CY21 deposits growth target of 3-4%as we expect heavy withdrawals and spending to occur in the 4QCY21 period, which would be fuelled by year-end seasonalities. Meanwhile, system LDR reported at 82.5% (Aug 2021: 83.1%, Sep 2020: 84.2%) but we expect a rise in this ratio due to the abovementioned shifts. In terms of capital, industry CET-1 ratio fell slightly, at 14.48% (-19bps) with the payments of certain halfyearly dividends during the month.

Maintain NEUTRAL on the banking sector. It appears that a strong 4QCY21 is on track, as we had expected from the loosening of movement controls and with interstate travel spurring consumption. The initiatives from the Budget 2022are mostly positive for the banking sector as various measures have been proposed to increase household income with jobs creation and more cash assistances. Businesses (mainly SMEs) will benefit with enhanced micro-lending facilities while receiving incentives for hiring employees from targeted groups. However, the one-off Prosperity Tax will hurt CY22Eearnings, by 5-14% within our coverage buthas a marginal impact to our TPs (refer to overleaf for further details). That said, there should still be an overall improvement from CY21 amidst better loans performance, asset quality and lower net impairments. However, the uncertainties behind NIMs leave us cautious as its correction could be quicker-than-expected. MAYBANK(OP; TP: RM10.55) is our Top Pick for dividend safety (6-7% yield) and RHBBANK (OP; TP: RM6.10) as a tactical pick for its potential participation in the digital banking space.

Source: Kenanga Research - 1 Nov 2021