Bank Negara Malaysia (BNM) has released the banking system data for August 2020. Macquarie Equities Research (MQ Research) notes in its report (30 Sep) that non-consumer repayments have dropped sharply, suggesting weakness in businesses, though stable credit card transactions indicate consumption strength. Loan applications suggest robust demand for credit, but loans growth has slowed as approval rates remained constrained despite ample liquidity.

Event

• August loans growth decelerated to +4.4% y/y (July: +4.5%), as working capital lending saw sharp deceleration to +2.6% y/y; suggests liquidity measures for businesses (e.g. special relief fund) are winding down. MQ Research expects loans growth will decelerate further going forward. Pick-up in consumer loans, particularly +1.5% y/y hire purchase (HP) loans growth (albeit off a low base) feeds optimism on the consumption outlook. Deposit growth remained relatively healthy at +4.5%, with current account and savings account (CASA) ratio continuing to break record highs, hitting 30% in August on +20.2% y/y growth (July +18.4%). Thus, high liquidity persisting in the banking system with loan-to-deposit ratio of 88% and liquidity coverage ratio of 149%. While the +125bps year to date overnight policy rate (OPR) cuts continue to put pressure on margins, MQ Research notes a slight recovery in 12-month fixed deposit (FD) rates, suggesting banks are beginning to shore up long-dated deposits. Consumer loans moratoria and aggressive rescheduling and restructuring (R&R) of non-consumer loans continue to distort asset quality indicators; gross impaired loans remained very low at 1.4%. In turn, loan loss coverage ratio is up to ~100%. Capital ratios remain healthy with sector common equity tier 1 (CET1) of 14.4% in August.
• MQ Research recently refreshed its valuations/earnings/rec for banks. Minimal changes to MQ Research’s earnings, following aggressive cuts earlier this year, but upgrade Maybank and AmBank to Neutral following weak share price performance. MQ Research has RHB as its top pick, followed by CIMB and Hong Leong. MQ Research anticipates a catalyst for sector re-rating could come once banks provision guidance peaks as early as Feb 2021.

Impact

• Recovery indicators were a mixed bag in August. While credit card transaction data (a proxy for consumption) held steady, the sharp fall in loan repayments by businesses could indicate cashflow/revenue weakness. This is potentially distorted by R&R programs as well as winding down of liquidity support programs like special relief facility (SRF). Unfortunately, BNM discontinued the EPF contribution statistical series, which MQ Research had been using as a proxy for private sector incomes.

Outlook

• As per MQ Research’s recent update, it is incrementally positive on banks, as 1) valuations have regressed close to March/April lows, 2) macro uncertainty is lower, 3) earnings expectations are also lower. Post-moratoria data (October data, published end-November) points will be crucial, with focus on 1) moratoria extension take-up rates, 2) consumption indicators, 3) repayment trajectory. MQ Research’s order of preference: RHB> CIMB> Hong Leong> Public > Maybank > AmBank.

Source: Macquarie Research - 1 Oct 2020