Macquarie Equities Research (MQ Research) summarized Bank Negara’s (BNM) banking stats for May 2020. Among the key highlights include the slowdown in both loan repayment and disbursement, coupled with a declined rate in loan applications and approvals, which is in-line with MQ Research’s expectation. Although the BNM has cut a total 1.0% interest rate so far this year, MQ Research expects another 0.5% rate cut in the coming 7 July MPC meeting.

MQ Research prefers CIMB and RHB with Hong Leong Bank as its defensive name. Read on MQ Research’s report dated 30 Jun for more.

Event

• May systems loans growth was +3.9% y/y, driven by a slowdown in repayments -24% (vs the recent average) due to moratoriums while disbursements decelerated by -27%. Both applications and approvals also tumbled with approval rates hitting a low of 39%. Loans growth saw a divergence between corporate (+4.9% y/y) and retail (+3.2% y/y) with the latter touching record-low growth. On the deposit front, increased cash holdings continued to spur current account savings account (CASA) ratios to 30% on 13% CASA growth vs -1.3% fixed deposit (FD) growth. Average lending rates are now -32bps year-to-date (YTD), in-line with the 100bps YTD overnight policy rate (OPR) cuts.

• The data is in-line with MQ Research’s expectations. MQ Research prefers CIMB and RHB on a positive risk-reward skew as its top picks for the sector. MQ Research prefers Hong Leong over Public among defensive names. Maybank and AmBank are MQ Research’s least preferred banks, the former on high valuations vs risk, the latter on asset quality risk and a lack of catalysts.

Impact

• As expected of the movement control order (MCO) lockdown for COVID-19 (only relaxed on June 8), disbursements in the month of May remained at roughly 76% of pre-COVID-19 run rates. Loans growth was instead driven by the moratorium on most consumer and small-medium enterprise (SME) loans that trimmed repayment rates to ~72% of pre-COVID-19 levels. Considering the sector’s estimated moratorium rates of 59%, there appears to be a considerable divergence with actual repayment rates. This suggests a substantial number of customers continue to make payments without officially opting out with banks. On the deposit front, CASA positions continue to swell as customers eschew fixed deposits amid the falling interest rates. The higher CASA ratio should help to alleviate some of the net interest margin (NIM) compression from the OPR cuts; MQ Research forecasts another 50bps of cuts in the coming July 7 monetary policy committee meeting. MQ Research anticipates muted cash withdrawals during the lockdown, and government cash handouts are supporting CASA levels.

• Overall banking liquidity remains robust with an 88.7% loan-to-deposit (LDR) ratio, though the liquidity coverage ratio dipped to 140% (Jan: 151%). Asset quality indicators like gross impaired loan (GIL) ratios (as expected) will be obfuscated by the moratoriums (until Sept). The loan loss coverage ratio improved to 89bps. Capital ratios remain sufficient with a sector-wide common equity tier 1 (CET1) of 14% and should be ample through the crisis as MQ Research expects banks will be trimming dividend payouts.

Outlook

• With adjusted unemployment hitting 5.9% in April, MQ Research remains cautious on banks’ asset quality, as the stable GIL ratios do not paint the full picture due to the moratoriums. June stats will be more critical, providing insight into the banking sector’s post-lockdown trajectory, in particular for loans growth and disbursements. MQ Research is also mindful of broad-based moratorium extensions.

12-month Target Price Methodology

• CIMB MK: RM4.50 based on a Price to Book methodology
• RHBBANK MK: RM6.20 based on a Price to Book methodology
• HLBK MK: RM16.30 based on a Price to Book methodology
• PBK MK: RM16.20 based on a Price to Book methodology
• MAY MK: RM7.20 based on a Price to Book methodology
• AMM MK: RM2.85 based on a Price to Book methodology

Source: Macquarie Research - 2 Jul 2020