Better-than-expected loan growth bodes well for banks

It’ll cushion higher provisioning for bad debt and squeeze in net interest margins: CGS-CIMB

PETALING JAYA: Better than expected loan growth in the banking sector is expected to cushion the higher loan loss provisioning (LLP) and the squeeze in net interest margins faced by the industry, possibly due to the relaxation of the movement control order (MCO), according to analysts.

CGS-CIMB noted that the improvement mainly came from a pick-up in the household loan momentum from 3.2% year-on-year (yoy) at end-May to 3.5% yoy at endJune 2020.

Conversely, business loan growth eased to 4.2% yoy at end-June from 4.5% yoy in the previous month.

The research house stated that the industry’s total loans expanded by 1.6% in 1H’20, above its projected loan growth of 0% for 2020F.

“The Covid-19 outbreak did not result in a contraction in banks’ loan growth in 1H20 thanks to a reduction in loan repayments due to the loan moratorium, and disbursement of the facilities under Special Relief Fund for business borrowers,” it said in a report.

The industry’s loan applications and approvals normalised with the relaxation of the MCO. CGS-CIMB highlighted that loan applications and approvals surged by 45.2% month-on-month (mom) and 66.3% mom, respectively in June.

Based on June’s banking statistics, it deduced that loan growth was stable at about 4% yoy at end-March and end-June this year, and the 2Q’20 LLP could have increased quarter-on-quarter as the total provision for the industry rose by RM1.36 billion in 2Q’20 vs. a RM1.14 billion increase in 1Q’20.

It is maintaining its neutral call on the sector, with its top picks being Public Bank, RHB Bank and AMMB.

AmInvestment Bank Research (AmResearch) also noticed that the industry loan applications rebounded and registered a positive growth of 8% yoy in June against a 39% yoy decline in May.

For the month, the level of household applications surged while that for non household loan applications continued to slide. The research house said June saw higher levels of applications for purchase of passenger cars, residential property loans, credit cards and personal loans.

“Growth in industry loan approvals improved with a lower contraction of 12.7% yoy vs. -54.4% yoy in May 2020, contributed by higher levels of household and nonhousehold loan approvals,” it said.

AmResearch also highlighted that the industry deposit growth rose to 4.4% yoy while current account savings account (CASA) continued to expand strongly at 16.8% yoy leading to a higher CASA ratio of 28.9%.

On the other hand, the sector’s liquidity coverage ratio (LCR) increased to 149% from 140% in May, contributed by the shift in wholesale funding to deposits. Impaired loans and provisions declined on a monthly basis with the industry’s outstanding impaired loans in June 2020 declined by 5.3% mom or RM1.5 billion.

By loan purpose, it pointed out that the decrease was largely driven by lower impairments of loans for construction, working capital and most segments of household loans mom.

The research house stated that the industry’s total gross impaired loans (GIL) improved slightly to 1.5% while net impaired loan ratio held up at 0.9% as the sector’s loan loss cover improved to 92.9%.

Furthermore, the excess capital buffer remained healthy at RM120 billion to withstand any shocks/losses.

Similarly, AmResearch also maintained it neutral call on the sector on concerns of upticks in impairments of loans after the blanket automatic moratorium ends on September 2020.

“Our top picks for the sector remain Maybank with a fair value of RM8.40/share and RHB Bank with a fair value of RM6/share.”