Highlights

HLBank Research Highlights

Author: HLInvest   |   Latest post: Tue, 11 Aug 2020, 5:48 PM

 

Banking - Still Holding Up Well

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System loans growth tapered marginally to 3.9% YoY in May-20 while deposits growth was unchanged at 2.8%, and asset quality held steady. However, leading indicators remained weak. Besides, the recent OPR reduction and potentially another one (-25bp) in 2H20 will exert pressure on NIM. Nevertheless, we see these negatives coupled with Covid-19 related headwinds being balanced out by the sector’s deflated valuations (P/B close to -2SD and lower than GFC’s level). Maintain NEUTRAL and the only banking stock that we like now is RHB (TP: RM5.80), mainly for its strong CET 1 ratio, relatively large untapped FVOCI reserves, and undemanding valuations.

Loans growth slow s a tad. May-20’s system loans growth slowed marginally to 3.9% YoY (Apr-20: 4.0%), no thanks to both business (Biz) and household (HH) lending of 4.5% and 3.2% respectively; although still resilient and above our +2.0 -2.5% full year growth expectations, we see a slowdown in the upcoming months given confluence of events from Covid-19 crisis and imminent recession. In biz, main contributor was still working capital as it grew 4.6%. As for HH, the deceleration was due to the decline in credit card (-9.6%) and auto loans (-1.5%).

Leading indicators remained frail. Loan application fell 39.0% (Apr-20: -41.4%) due to weak credit demand from both HH (-59.7%) and Biz (-12.1%). Also, loan approvals declined 54.4% (Apr-20: -48.4%) on the back of tighter lending for both HH (-67.7%) and Biz (-40.3%).

Unchanged deposits growth at 2.8% (Apr-20: +2.8%) as fixed deposits taper further (-1.3%) but was eased by a more robust CASA growth (+13.7% vs Apr-20’s +12.6%); banks managed fixed deposits lower to prevent overexposure ahead of the recent OPR cut. In May-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 held steady as gross impaired loans (GIL) ratio ticked down 3bp MoM to 1.55%; this was thanks to HH (-4bp MoM), where the mortgage, auto, and personal financing segments improved. As for Biz, GIL ratio was flat MoM. Overall, we see the sector’s GIL ratio to remain at low levels till end Sep-20; borrowers were granted 6- mth loans deferment while the restructuring & rescheduling (R&R) of loans affected by Covid-19 will not be tagged as impaired; however, we expect GIL ratio to rise faster after the moratorium period.

Interest spread widened. Both the average lending and 3-month board fixed deposit rates contracted 25bp and 48bp MoM respectively. As a result, the spread broadened 23bp MoM to 2.13%. However, this is likely to be short-lived and we see weaker net interest margins (NIM) outlook given the recent OPR reduction and potentially another one (-25bp) in 2H20. Furthermore, there is diminishing flexibility to optimize LDR.

Retain NEUTRAL. Near-term Covid-19 related headwinds are being balanced out by the sector’s deflated valuations. For exposure, the only bank that we like now is RHB (BUY, TP: RM5.80) given its appealing risk-reward profile, backed by undemanding valuations, strong CET1 ratio of 16.6% (sector: 14.0%), and relatively large untapped FVOCI reserves. On the other hand, we have SELL ratings on Public (TP: RM14.80) and Affin (TP: RM1.55) for rich valuations and high portfolio concentration of HP loans respectively.

Source: Hong Leong Investment Bank Research - 1 Jul 2020

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