Bank Negara Malaysia (BNM) released the banking system data for May 2021, showing that the MCO3.0 impact is visible in May but was relatively mild compared to MCO1.0 and 2.0. In a report dated 2 July, Macquarie Equities Research (MQ Research) notes the slowing loan applications and credit card spend, and that the 6-month moratorium will further delay gross impaired loans recognition.

MCO3.0 in May: Nothing Alarming

• MCO3.0, the third national lockdown (movement control order) began on 5 May and has had a visible impact on consumption indicators. Credit card spend eased to RM10bn (-8% month-on-month (m/m), -11% vs pre-Covid), but not as drastic as the MCO1.0 and MCO2.0 impact. This is likely to weaken further in June/July. Loan applications also began to decelerate in May. As lockdowns hampered transactions, consumer loan applications fell -15% m/m but were still +180% year-on-year (y/y) vs the low base; trailing twelve months (T12M) applications were still up +42% y/y. Applications for residential loans fell -10% m/m, while auto loans fell -32% m/m. Nonetheless, residential/auto loans continue to lead overall sector loan growth.
• Loan repayments are an early indicator of asset quality stress. Overall, repayment levels remained stable. Consumer loans saw a marginal -2% m/m dip, while non-consumer loan repayments dipped -5% off a high base. Furthermore, non-consumer loan repayments should be seen in the context of relatively high disbursements, indicating elevated debt turnover. With the announcement of further loan moratoriums (as part of the government’s stimulus package), MQ Research would expect to see repayment levels dip in July/ August. The quantum of the fall will be a useful indication of the stress to asset quality from the prolonged lockdown. MQ Research also notes that there should be minimal risk of incremental modification losses from the moratorium. MQ Research continues to see the consumer book as relatively resilient (compared with the non-consumer book), underpinned by the robust labour market as of April. Headline gross impaired loans (GIL) ratios remain low at 1.59%.

Still liquid, supportive of net interest margins (NIM)

• Liquidity in the banking system remains ample, with loan to deposit ratios hovering at 88% and current accounts and savings accounts (CASA) ratios at record high 32% supportive of lower cost of funds in 2Q21 and better NIMs. Deposit growth (+5% y/y) continues to outpace loan growth (+3.9% y/y). Liquidity coverage ratios did narrow to 137% from 152% but remain ample. The loan loss coverage ratio of 110% and common equity tier 1 (CET1) ratio of 14.3% remain healthy.

Outlook

• Despite the challenges for MCO3.0+, MQ Research maintains its positive outlook on banks, especially with the recent stimulus announcement confirming that the risk of blanket moratoria is off the cards. While the recent extension of lockdowns and tightening of movement control in the greater Klang Valley is incrementally negative to 2021 gross domestic product (GDP), MQ Research remains optimistic that accelerating vaccination rates underpin economic reopening in Aug/Sept. MQ Research’s order of preference is RHB > HLBK > CIMB > PBK > MAY > AMMB.

Source: Macquarie Research - 5 Jul 2021