In January, despite the MCO2.0 and floods in several states in Malaysia, the Malaysia labor market remained resilient with only a slight increase in unemployment rate of 0.05% to 4.88%. MQ Research expects consumer-focused banks to outperform while it sees more upside in non-counsumer banks. RHB Bank remains as MQ Research’s top pick.

January Unemployment: 4.88%

• Unemployment is a key indicator of the medium-term impact of the pandemic on the economy, and crucially banks’ asset quality as well. Department of Statistics Malaysia (DOSM) reported January unemployment of 4.88%, which is a 5bps month-on-month (m-o-m) increase. Crucially, gross employment saw +21.9k jobs m-o-m added vs the +9.6k m-o-m increase in unemployed persons. This indicates a high level of resilience in the broader economy, considering MCO2.0 was implemented in mid-January, which forced non-essential businesses to close (e.g. night markets, spas/reflexology, laundry, tailoring, clothes, optical, arts & entertainment). Additionally, there were floods in Pahang, Kelantan and Johor since December 2020.

• The services sector enjoyed hiring growth, particularly in wholesale & retail trade, health & social work, and education. Manufacturing and construction also saw continued re-hiring. Not surprisingly, tourism-related industries led layoffs, followed by agriculture, mining and quarrying. Overall unemployment is currently hovering at 266k persons vs pre-Covid levels.

• Diving into the numbers, unemployment remains heavily skewed to younger workers, with 15-24 y/o’s suffering 13.5% unemployment. At the same time, long-term unemployment remains relatively stable with persons >6 months unemployed rising by only +1k m-o-m; which is a decent outcome >11 months after Covid-19 first hit.

Targeted Repayment Assistance

• Banks’ consumer books are not created equal, and this can be seen in banks’ 4Q20 reporting of targeted repayment assistance (TRA) guidance for the Malaysian consumer book – support to customers in the form of reduction in monthly instalments or deferment of monthly payments. All banks indicated an increase in TRA numbers, with the exception of Hong Leong Bank (HLBK). AmBank and RHB were the obvious outliers with 22% and 17% TRA respectively. With the relaxation of MCO2.0 on March 5, the trajectory for TRA is on the decline, guide banks, but is still expected to be relatively volatile in the coming months.

Outlook

Labour market stats continue to support MQ Research’s constructive view on consumer banking. MQ Research expects consumer-focused banks (Public Bank (PBK)/HLBK) to outperform from an operational and asset quality perspective in FY21; putting a high floor under valuations. However, valuations for said banks are expensive, capping upside as well. MQ Research sees more upside in the non-consumer banks, with RHB as MQ Research’s top pick, which is positioned to outperform peers on its non-consumer asset quality that is driving the lowest credit cost guidance (30-40bps) vs Maybank and CIMB’s 80-90bps and 70-80bps respectively.

Source: Macquarie Research - 23 Mar 2021