Bank Negara Malaysia (BNM) has released the banking system data for October 2021, which marks the second consecutive month of mobility restrictions easing. Domestic credit-card spend surged to a record high, while consumer loan applications rose month-on-month as transaction curtailment eases. Meanwhile, loan repayments continued to improve, which is a positive read-through for asset quality.

Inflection

• Strong consumer indicators: Economic reopening tailwinds are evident in October’s banking system numbers. Overall takeaways remain positive for sector fundamentals. Headline consumer indicators continue to improve, with credit-card spend +14% month-on-month (m/m). Excluding foreign card holders (international borders still closed), domestic credit-card spend (+15% m/m) hit a record high RM11.8bn. Loan applications also skewed towards the consumer book (+15.3% m/m) vs non-consumer (-8% m/m), led by residential mortgages (+18% m/m) and passenger vehicles (+34% m/m). While headline working capital loans is still growing +0.9% m/m (low base effect), applications for working capital were relatively weak (-12% m/m).
• Asset quality indicators, improving: Loan repayments are a useful leading indicator for underlying asset quality stress. Headline repayments improved +3.1% m/m (Sept: +2.8% m/m) as moratoria unwinds. Consumer loan repayments rebounded +8.5% m/m (Sept: +6.8% m/m). This is roughly 2.2% repayment/outstanding; which is 15% shy of the pre-Covid averaged 2.6%. Overall, this is a highly encouraging trend. Meanwhile, non-consumer loans are seeing high credit recycling with a jump in repayment/disbursement rates.
• Loan impairment recognition continues to be distorted by generous repayment assistance programs. Headline gross impaired loans (GIL) ratio improved to 1.55% (Sept: 1.62%) on the back of a -2.7% m/m reduction in GIL, let by consumer loans (-4% m/m).

Liquidity Starting to Tighten

• Deposit growth (+4.4% year-on-year (y/y)) continues to outpace loans growth (+3.3% y/y), but there are some signs of tightening liquidity. Sequentially, deposits contracted -0.5% m/m, led by current account and savings account (CASA) (-0.6% m/m). Headline CASA ratios remain near-record highs at 31.7%, and the decline in CASA appears to be driven by corporates. Headline loan-to-deposit ratio tightened to 87.2% in October (Sept: 86.4%), while liquidity coverage ratio remains healthy at 153%. The banks’ capital ratios fell slightly to 14.3% common equity tier 1 (CET1), though still at healthy levels.

Positive outlook, especially for consumer books

• The improving bank-sector numbers tracks well with MQ Research’s expectations for an economic reopening and continues to affirm its preference for consumer banks. With underlying asset quality improving in-step with the economic reopening, MQ Research continues to place a higher emphasis on asset growth. Loan application data suggest consumer-focused banks will outperform on this front. MQ Research’s order of preference: RHB > HLBK > Public > CIMB > MAY > AMMB.

Source: Macquarie Research - 10 Dec 2021