The banking system data for September 2021 released by Bank Negara Malaysia (BNM) recently was encouraging with consumer indicators such as credit card spending rising 12% month-on-month (m-o-m), up three months in a row, while loan applications for housing loan and hire purchase are up by 31% m-o-m and 90% m-o-m, respectively. Despite an increase in overall loan applications, working capital contracted in September, which Macquarie Equities Research (MQ Research) views as a negative signal for non-consumer banks.

Inflection

• The economic reopening that accelerated significantly in September is highly evident in the month’s banking system data; generally, the takeaways are positive. Consumer indicators improved as credit card spend (a proxy for consumer spending) rose a third consecutive month (+12% month-on-month (m-o-m)) to within ~5% of pre-COVID levels. At the same time, pent-up consumer loan applications were unleashed with a +32% m-o-m bounce. Loan applications were led by housing (+31% m-o-m) and hire purchase (+90% m-o-m). However, the stronger applications have yet to translate to sector loans growth due to lag effect; consumer loans grew +3.2% y/y (+1% m-o-m) only vs non-consumer loans growth of +2.6% (+1.5% m-o-m) that was recovering off a low base.

• Loan repayments are a useful indicator for underlying asset quality stress. Headline loan repayments improved 3% m-o-m, led by consumer (+7% m-o-m) vs non-consumer (+2% m-o-m). Overall, this trend is encouraging given the announcement of the interest waiver in mid-September that raised concerns of increased loan moratoria applications; the interest waivers have since been substantially toned down.

• Loan impairment recognition continues to be distorted by generous repayment assistance programs. Notwithstanding, headline gross-impaired loans (GIL) ratios improved to 1.57% on the back of recoveries in the non-consumer book. Gross GIL improved by 5% m-o-m, led by a 17% m-o-m reduction in agriculture sector GIL and a 19% improvement for manufacturing GIL; respectively making up 7% and 22% of non-consumer GIL.

Lacklustre working capital applications a concern

• MQ Research thinks asset growth should be a key focus going forward. Despite a 12% bounce in overall loan applications, working capital loan applications actually contracted by -12% m-o-m. This has a negative read-through for non-consumer banks. Banks should be lending more to businesses as the economy reopens, especially with the high liquidity in the system: loan-to-deposit ratios improved further to 86% while current account savings account (CASA) ratios remain near record highs at 32%. System capital adequacy remains ample at 14.4% common equity tier 1 (CET1).

Broadly Positive for 3Q21

• For 3Q21, MQ Research expects the focus will be on the recently announced “Prosperity Tax” of Budget 2022, which incentivises banks to halt pre-emptive provision recognition in FY21. The positive asset quality read-through from the bank stats would support the move, especially with economic reopening underway. The data continues to support MQ Research’s preference for consumer banks. MQ Research’s top sector picks are RHB Bank, Hong Leong Bank, and Public Bank.

Source: Macquarie Research - 3 Nov 2021