April unemployment rate improved to 4.6%, the lowest since October 2020, with most sectors showing strong employment especially in manufacturing. Macquarie Equities Research (MQ Research) expects delayed recovery trends in May and June due to the prolonged MC03.0, though it expects the labor market to remain resilient, providing a positive read-thru for consumer-focused banks. Banking stocks wise, MQ Research prefers RHB, CIMB and Hong Leong Bank, among others.

April Unemployment Improved to 4.61%

• Unemployment is a key indicator of the medium-term impact of the pandemic on the economy and, crucially, banks’ asset quality. Department of Statistics Malaysia (DOSM) reported April unemployment of 4.61%, which is a 7bps improvement month-on-month (MoM). Importantly, gross employment rose for the fifth consecutive month to 15.35m, which is on par with pre-pandemic levels. Employment continues to be strong across most sectors, especially manufacturing. The only sectors that saw softening labour demand were agriculture and mining & quarrying.

• Long-term (greater than six months) unemployment also improved, falling 6.4% MoM, which is a positive indicator for labour market health. However, gross short-term (less than three months) unemployment did inch up, indicating some weakness in the otherwise positive labour market headlines. Younger workers continue to bear the brunt of the pandemic’s impact on the labour market, with 13.7% unemployment for 15–24 years old. While there are negative long-term implications of elevated youth unemployment, MQ Research can infer less severe impact on bank’s asset quality short term.

Labour Recovery to Stall in Lockdown

• The post-lockdown (MCO2.0) momentum from March was evident in April’s robust labour market stats. However, with MCO3.0 lockdowns to curb rising infection rates beginning in early-May, the trajectory could stall. Keeping in mind that most businesses continued to operate unaffected in the first phase of MCO3.0, MQ Research expects the worst impact to be evident only in the stats for June, when lockdown measures were tightened (MCO3.0+).

• That said, MQ Research expects the labour market to remain resilient. Firstly, 1Q21 hiring appears heavily skewed to recovery-leading sectors like manufacturing. The sectors hardest hit by the pandemic saw subdued hiring, as many businesses remained in hibernation or operated with minimum scale to conserve cash (eg, cinemas and hotels). This suggests a labour market less reactive to the opening/lockdown of economic activities. Secondly, rapidly accelerating vaccination rates (8 June saw 151k jabs/day) will also lend more confidence for businesses to wait out MCO3.0+, especially with infection rates peaking.

Outlook

• MQ Research expects the labour market to remain resilient, providing a positive read-thru for consumer-focused banks. This is reflected in the strong beats by banks in the 1Q21 reporting season as well as April bank stats. MQ Research is reiterating its view that consumer banks should outperform operationally – asset growth, asset quality – vs corporate-focused banks. However, given the relatively high valuations of consumer banks, MQ Research sees more upside in beta names. MQ Research’s preferences: RHB > CIMB > HLBK > PBK > MAY > AMMB.

Source: Macquarie Research - 15 Jun 2021