This article first appeared in The Edge Financial Daily on March 6, 2020

Banking sector
Maintain overweight: January 2020 loans moderated to +3.5% year-on-year (y-o-y) underpinned by a resilient household at +5% y-o-y. While loan growth will be a challenge given the growing Covid-19 epidemic, we believe soft interest rates would support households to stay resilient with support from fiscal push on the cards. And when the noise around the epidemic subsides, loan momentum will likely recover.

While asset quality showed improvements since August 2019, January 2020 saw a deterioration as gross impaired loans (GIL) saw an uptick of eight basis points (bps) y-o-y and 5bps month-on-month to 1.56%. The deterioration was broad with both business and household GIL posting uptick of 3bps and 2bps (from December 2019) to end at 0.97% and 0.59%, respectively. We do not expect significant uptick in GIL in the coming months given the moratorium and reschedule and restructure facilities provided by banks during the virus epidemic period. While GIL surged +9% y-oy, loan-loss provisions in the banking system fell 4% y-o-y; hence loan loss coverage fell 220bps to 87%.

Given the moderate loans, January deposits ended up 3% y-o-y to RM1,961 billion. Current and savings accounts saw a 6% y-o-y improvement (versus fixed deposits of -0.4% y-o-y) mitigating funding cost pressure given the recent overnight policy rate cuts. Liquidity remained ample with loan-to-deposit ratio and loan-to-fund ratio at 90% and 83%, respectively, with excess liquidity shedding 40bps to 9.7% and unlikely to aggravate funding costs pressure as credit demand moderates.

Moving forward, we expect accommodative interest rates to continue to support a resilient household sector, mitigating the moderation in business spending. Given the banks’ modest target for 2020 after the recent results season, we expect system loans to end at 4-4.5% y-o-y (more on a downside bias) driven by a resilient household sector (5-5.4%) and business (2-2.5%) coming from a fiscal push expected in the second half of 2020. The soft interest rate regime is expected to support loan growth coupled with ease of applications. While the uptick in impaired loans is a concern, it is still below the five-year peak of 1.67% in February 2015.

Valuations of our banking universe are attractive and undemanding with most at “outperform”, Alliance Bank Malaysia Bhd (target price [TP]: RM2.90), AMMB Holdings Bhd (TP: RM4.20), Bank Islam Malaysia Bhd (TP: RM4.95), CIMB Bank Bhd (TP: RM5.60), Malayan Banking Bhd (Maybank) (TP: RM9.05), MBSB Bank Bhd (TP: RM1.10), Public Bank Bhd (TP: RM20.70) and Hong Leong Bank Bhd (TP: RM16.45). Affin Bank Bhd (TP: RM1.85), and RHB Bank Bhd (TP: RM5.85) are at “market perform”.

Our top pick is CIMB and Maybank benefitting from: i) fiscal push (domestic and regionally); ii) accommodative interest rates prevailing and; iii) resilient households plus attractive dividend yields of about 5% and 8% respectively. — Kenanga Research, March 5