Bank Negara Malaysia (BNM) forecasts Malaysia’s 2021 economic growth in a range of 6% to 7.5%, higher than Macquarie Equities Research’s (MQ Research) forecast of 5.5%, with inflation outlook of 2.5% to 4% headline and 0.5% to 1.5% core. MQ Research expects the MCO2.0 trends to loosen quickly in March and reiterates its view that consumer-centric banks will outperform this year, with CIMB and RHB as its top picks.
 
Financial stability review (FSR) and Macro takeaways

• Stress test: BNM refined the stress test to account for shocks that may disrupt the recovery trajectory of the economy. The worst-case “Adverse Scenario 2” models 5.4% gross impaired loans (GIL) ratio by 2022E, which assumes fairly aggressive downside risks: unemployment rises above the current 4.8% level and remains elevated, while gross domestic product (GDP) contracts in CY21E and remains below pre-pandemic levels in CY22E. Additionally, it assumes low house price growth, weak income growth and rising foreclosures on properties. Even in such a scenario, BNM models bank common equity tier 1 (CET1s) would only decline to 13.9% (CY20: 14.8%). Low-income households present as the primary downside risk to banks in BNM’s stress test.

• Macro outlook: BNM is forecasting 6-7.5% GDP growth in CY21E (MQ 5.5%), albeit flagging that risks remain skewed to the downside. The biggest swing factor in the forecast range will be vaccine deployments, with the 6% low case assuming herd immunity is only achieved in 2022. More pertinent is BNM’s inflation outlook of 2.5%-4% headline and 0.5%-1.5% core. The central bank stressed that supply-driven cost-push inflation would not be addressed by monetary policy, which is more appropriate for demand-pull inflation. Positive for net interest margins (NIM). Ample capacity remains in the economy, which should stamp inflation expectations and non-productive inflationary wage growth.

 
February bank stats

• The impact of MCO2.0 was more pronounced in February, particularly with loan applications, disbursements and repayments seeing a sharp drop across the board. Credit card transaction value, which is a useful consumption indicator, saw a -19% year-on-year (y/y) correction in February; but excluding foreign cardholders it was only -11% y/y – substantially milder vs 2Q2020 impact. Gross impaired loans trajectory also flattened out in February, as a second wave of targeted repayment assistance was offered to consumer borrowers. Excess liquidity remains apparent. Deposit/current account saving account (CASA) saw another surge, pushing CASA ratios to record 31.4%; three-month fixed deposit (FD) rates also fell below 2%, which should help bank NIMs. Overall, MQ Research expects the MCO2.0 trends to unwind rapidly in March.

 
Outlook

• MQ Research reiterates the view that consumer-centric banks will outperform in 2021, riding on better asset quality and loan growth. However, MQ Research has RHB/CIMB as its top picks due to better valuation upside, Hong Leong Bank and Public Bank as its #3/#4 picks on weak OP due to a high floor under valuations, and Maybank/Ambank its least preferred.