Oct 2021 system loan rose by 3.3% YoY with a MoM increase of 0.5%, which was expected in lieu of reinvigorated economic activity. We anticipate CY21 to close with a loans growth of 3-4%. Loans disbursement saw a sequential decline, but this is owing to lumpy distributions in Sept 2021 from clearing itsbacklog. Loan repayments, applications and approvals all registered better YoY and MoM growth, as expected as well. In terms of gross impaired loans (GIL), it came in at 1.52% (-5bps MoM) as both household and business loanborrowers are slowly regaining their financial health and paying more promptly. Meanwhile, total deposits saw a MoM decline with CASA-to-deposit mix easing slightly (- 9bps) which could be due to corporate withdrawals. We expect withdrawals to be heavier in the remaining months, in line with our 3-4% YoY deposits growth expectation. We are NEUTRAL on the banking sector still as fresh uncertainties have been brought by new Covid-19 variants which could trigger another round of tightened movement controls, erasing the economic progress madeso far. Having closed the 3QCY21 earnings report card,we still believe our picks of: (i) MAYBANK (OP; TP: RM10.55); and (ii) RHBBANK (OP; TP: RM6.50) make solid picks for capital safety and dividend buffers against potential downside.

Oct 2021 keeping the momentum going. YoY, system loans rose by 3.3% on the back of both household (+3.7%) and business (+2.9%) loan accounts. The less restrictive environment during the month has allowed for more liberal spending and greater investment confidence. This is also reflected on a MoM basis with a 0.5% overall increase, with households at +0.7% and businesses at +0.2%. On the flipside, loan disbursement fell by 3.3% MoM but this is likely due to the clearing of backlog from Sep 2021, having just exited tighter controls in Aug 2021. Loan repayments trended positively (+18.7% YoY, +3.1% MoM) as income streams are now more predictable (refer to Table 1-3 for breakdown of system loans). We maintain our CY21 system loans growth target of 3-4% with continuing traction expected to be seen in Dec 2021 on year-end festivities and pent up spending.

Loan applications increasing (+4% YoY, +7% MoM) as households are likely more inclined to make big ticket purchases (i.e. residential properties, vehicles) in a healthier financial environment. On the flipside, business loan applications decline by 8% YoY and MoM, but we believe that this is due to the same backlog of prior applications yet to be cleared, given that the current climate is more business-friendly.

(refer to Table 4-5 for breakdown of system loan applications).

Impairments continue to ease. Oct 2021 total impairment was 10% higher YoY but saw a sequential improvement of 3% MoM. GIL ratio came in at 1.52% (-5 bps MoM) as the ongoing recovery is likely to improve the staging of previously troubled accounts. Ongoing repayment assistance programs could play a role in deferring the deterioration of certain accounts, until a time when a more meaningful recovery is seen to face debt again. That said, an industry loan loss coverage of 124.3% (Sep 2021: 120.8%, Oct 2020: 109.6%) is reflective of the general prudency still exercised by the banks, as it is still early days into our economic recovery (refer to Table 6-7 for breakdown of system impaired loans).

Deposits still lofty. As of Oct 2021, total deposits was 4.9% higher YoY but was 0.3% softer MoM. CASA-to-deposit ratio also tapered down slightly to 30.2% (-9 bps). We continue to anticipate withdrawals to flush the remaining two months of the year as households call for greater spending, especially during the year-end holiday window and festive seasonality. Our CY21 expectations remains for deposit growth to come in at 3-4% YoY. The high deposits mix also keep system LDR relatively favourable for the banks, clocking at 87.2% in Oct 2021 (Sept 2021: 86.4%, Oct 2020: 88.2%). Industry CET-1 ratio fell slightly at 14.42% (-6 bps) as banks are likely still committing to their dividends and other payments.

Maintain NEUTRAL on the banking sector. The recent 3QCY21 report card came in quite well with only one disappointment (MBSB) and 4 positive surprises (ABMB, AFFIN, CIMB, RHBBANK). The banks in general are likely to book precautionary provisions ahead of URUS applications (which opened mid-Nov) but do not expect significant impact from the interest waiver as its eligibility criteria is rather strict. That said, industry loans growth and asset health will be very much carried by the stability and rejuvenation of economic activities, which at this moment could be under threat should the new Covid-19 variant led to further containment measures. For the time being, we continue to advocate safety, which we find to be reasonable in MAYBANK (OP; TP: RM10.55) and RHBBANK (OP; TP: RM6.50).On top of high dividend yield propositions (6-8%), capital management capabilities is crucial to navigate through uncertainties which we believe these banks are not shy of.

Source: Kenanga Research - 1 Dec 2021