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Wednesday, April 1, 2020

Banking - Calm Before the Storm

System loans growth improved slightly to 3.9% YoY in Feb-20 while deposits growth slowed to 2.8%. However, there were some cautious lending behaviour, weakening in asset quality, and shrinking interest spread. Nevertheless, we see these negatives coupled with Covid-19 related headwinds being balanced out by the sector’s inexpensive valuations (P/B is now below -2SD and GFC’s level). Retain NEUTRAL and we like banks that were acutely bashed down; preferred picks are CIMB (TP: RM4.70) and Alliance (TP: RM2.50). Other BUY ratings are RHB (TP: RM5.40) and BIMB (TP: RM3.70).

Loans growth improved. Feb-20’s system loans growth recovered slightly to 3.9% YoY (Jan-20: +3.5%) as business (Biz) lending picked up to 3.6% while the household segment (HH) remained relatively flat at 4.4%. In Biz, the improvement came from working capital as it grew 0.6% vs a 0.4% contraction in Jan-20; also, this was due to higher disbursements. While for HH, mortgages (+7.3%) were still cushioning the drop in auto financing (-0.8%) and slower personal loans growth (+3.3%). Despite resilient showing in Feb-20, the negative effect of Covid-19 on local economic activity should hurt credit demand and steer banks to be more stringent in dishing out loans going forward. Besides, the 6-month loan moratorium will also likely affect banks’ cash flow and cap lending growth. Hence, we lower our 2020 system loans growth estimates to 3.0-3.5% (from 3.5-4.0%).

Cautious lending. Loans application expanded 40.7% (Jan-20: -14.6%) due to better credit demand from both Biz (+51.5%) and HH (+32.8%). However, loans approvals grew by a slower pace of 23.2% (Jan-20: -4.9%) given cautious lending as Biz and HH only increased 31.3% and 16.8% respectively.

Deposits growth slowed to 2.8% (Jan-20: +2.9%) as fixed deposits accumulation (+2.2%) continued to taper as banks managed these lower to prevent overexposure ahead of another 50bps OPR cut. In Feb-20, loan-to-deposit ratio (LDR) remained at 89% (similar to the peak of 89%, back in Feb-18). In general, deposit taking rivalry has eased as banks are trying to optimize down their cost of funds.

Asset quality weakened slightly as gross impaired loans ratio (GIL) nudged up 1bp MoM to 1.57%; this was no thanks to both the Biz (+2bp MoM) and HH (+1bp MoM) segments. In Biz, the uptick came from working capital while HH saw deterioration at the personal financing segment. In our opinion, the sector’s GIL ratio will still remain at low levels for the next 6 months as borrowers were granted loan moratorium while the restructuring & rescheduling (R&R) of loans affected by Covid-19 will not be tagged as impaired; however, there is concern that this may spike after the 6 months.

Interest spread shrunk. Both the average lending and 3-month board fixed deposit rates declined 4bp and 3bp MoM respectively. As a result, the spread contracted 1bp MoM to 1.95%. We reckon the squeeze will persist and we see weaker net interest margins (NIM) outlook given the recent OPR reduction and potentially another 50bps cut in 2020. Furthermore, there is diminishing flexibility to optimize LDR.

Maintain NEUTRAL as near-term headwinds are being balanced out by the sector’s inexpensive valuations. We like banking stocks that were acutely bashed down and especially those with P/B below 1.00x, GFC’s trough, and -2SD; two of our BUY calls meeting this criteria are CIMB (TP: RM4.70) and Alliance (TP: RM2.50), making them our preferred picks. Other BUYs are RHB (TP: RM5.40) and BIMB (TP: RM3.70).

Source: Hong Leong Investment Bank Research - 1 Apr 2020

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