Bank Negara Malaysia (BNM) has released the banking system data for July 2020. Macquarie Equities Research (MQ Research) notes in its report (31 Aug) that recovery indicators continued sequential improvement in July, with loan repayments and credit card spending close to pre-Covid levels. There is record CASA growth (+18.4% y/y), though the moratoria obscure non-performing loans.

Read on for more and MQ Research’s top banking stock picks.

Event

• July system loan growth accelerated to +4.5% year-on-year (y/y), supported by rebounding post-lockdown disbursements. Residential property lending saw modest recovery to +7.3% y/y growth, MQ Research anticipates, driven by a pick-up in construction activity and corresponding progress payment drawdowns. Applications continued to rise, but approval rates remain depressed at ~40%, lending still conservative. Personal loans again stood out with +5.2% y/y growth (usually averages +3.2%). Meanwhile working capital loans growth decelerated to +4.1% y/y after a brisk lending (+4.8%) thru the lockdown, suggesting the initial liquidity injection is tapering off. Deposit growth accelerated to +4.5% y/y, re-converging on loans growth after initially diverging. Current account and savings account (CASA) growth hit a record high of +18.4% to bring system CASA ratio to 29%; a function of low interest rates capping fixed deposit rollover. Should help the banks manage net interest margin (NIM) compression from the 125bps year to date (YTD) overnight policy rate (OPR) cut. Ample liquidity in the banking system, loans to deposit ratio at 88%, liquidity coverage ratio up to 152%. Finally, gross impaired loans (GIL) remain distorted by the moratorium as well as stage transfer freezing for R&R (rescheduling and restructuring), falling to 1.4% in July.
• Following the banks 2QCy20 results, MQ Research promotes RHB to its top pick for the sector, replacing CIMB. The recent correction in expectations (higher credit cost guidance, no interim dividend) should cap further downside risk for the former. Meanwhile, CIMB’s downgrade to credit cost guidance will give pause to upside in the short term as asset quality overhang remains. Both banks, however, are trading depressed relative to fair value, and as impairment outlook peaks in 1Q21, MQ Research expects both will enjoy the most upside from a re-rating.

Impact

• Recovery indicators in July will certainly give pause to pessimism. On the income front, EPF gross contributions (a good proxy) have made a complete recovery in July to pre-Covid levels. A key consumption indicator MQ Research is tracking, credit card transaction value, has recovered to within -6% of pre-Covid levels. Meanwhile, repayments have bounced back to pre-Covid levels, particularly from non-consumer borrowers. This suggests sufficient liquidity by borrowers on aggregate.

Outlook

• Despite the bloodbath in 2QCY20 banks earnings due to NIM compression, modification losses, and pre-emptive Covid-19 provisioning, incremental guidance downgrade is beginning to plateau. Coupled with the sequential improvement in recovery indicators, impairment outlook could peak as early as 1Q21 – a catalyst for sector re-rating. MQ Research’s new order of preference: RHB > CIMB > Hong Leong > Public > Maybank > AmBank.

Source: Macquarie Research - 2 Sept 2020