MIDF maintains positive call on banking sector

The investment bank said in a note today that the banking system's loans as at January 2021 grew at a slightly faster rate of 3.8 per cent year-on-year (y-o-y) compared with 3.4 per cent y-o-y in December 2020.

It added that the main contributor was the pace of growth for the top three loans segment, namely mortgage, automotive and working capital loans, which grew by 5.4 per cent y-o-y to RM1.22 trillion.

"Loan demand was robust with total loan applications growing by 9.7 per cent y-o-y versus 12.3 per cent y-o-y in December 2020.

"This was due to higher application for housing loans which rose 61.7 per cent y-o-y to RM25.9 billion, while applications for automotive loans grew 8.1 per cent y-o-y to RM6.6 billion," it said.

MIDF said retail loans growth continued to be consistent, growing by 5.7 per cent y-o-y to RM956.6 billion in January 2020, from RM953.7 billion in December 2020.

"We expect retail loans to continue providing support to the overall loans growth this year, especially with the various incentives for car and property purchase," it said.

On business loans, MIDF said the segment expanded to RM799.5 billion in January 2021 versus RM795.7 billion in December last year, driven by the faster growth pace of working capital loans.

"We expect business loans to grow at a faster pace than last year and boost the overall loans growth, premised upon a recovery in the economy," said MIDF.

However, it noted that banks remained cautious, as shown by the loan approval rate which contracted 3.5 per cent y-o-y, attributing it to the 26.8 per cent y-o-y contraction in the approved working capital loans which fell to RM5.2 billion.

Meanwhile, approved loans related to the retail segment, namely for the purchase of passenger cars and residential properties, grew 3.5 per cent y-o-y to RM4 billion and 25.9 per cent y-o-y to RM8.9 billion, respectively.

Conversely, the business segment may face some short-term weakness following the implementation of Movement Control Order (MCO 2.0), it said.

"Overall, we expect loan demand to accelerate this year, leading to higher loan growth, especially in the second half of this year (2H21).

"Besides consumer loans, we expect businesses to drive loans growth in 2021 to fund the expected increase in business activities," it said.

With this, MIDF expects a five per cent y-o-y loan growth for this year, compared to the loan growth average of 4.01 per cent last year.

On another note, it said the strong Current Account and Savings Account (CASA) growth remains unabated for now, continuing to be the main driver by maintaining its strong expansion since the loan moratorium was announced.

CASA accelerated to 24.1 per cent y-o-y in January 2021, from the 19.3 per cent y-o-y registered in the preceding month, while fixed deposits contracted for the eleventh consecutive month at 4.6 per cent y-o-y to RM957.8 billion, it said.

"We opine that depositors may be reluctant to tie-up their cash flows and desire to maintain liquidity, given the uncertain conditions as a result of COVID-19.

"We expect this to moderate the net interest margin (NIM) compression for banks in 2021," it said.

Meanwhile, MIDF also noted a continued uptick in gross impaired loans (GIL) ratio, following the end of the loan moratorium.

It also expected some fragility in asset quality, but said that this would be moderated by the targeted loan moratorium and repayment assistance.

Hence, MIDF has forecast a GIL ratio of circa 1.7 per cent this year.

Moving forward, MIDF said it is sanguine on the banking sector's prospects this year, made more certain with the rollout of vaccines which would be widely available in 2H21.

It expects banks' credit costs to start normalising, while income will stage a rebound on faster loans growth and benign NIM compression, thus improving earnings this year.

"We maintain a positive recommendation for the sector amidst the short-term pressure that banks will have to overcome.

"Primarily, the potential stress is on asset quality, but we opine that banks, in general, will be able to weather it, especially banks with large loan loss reserve and/or has been resilient during the current challenging environment," it said.

MIDF's top picks for the sector are Hong Leong Bank (buy, target price (TP): RM19.70) and RHB Bank (buy TP: RM5.90).