Research houses: Rising COVID-19 cases, loan repayments to dampen loan growth

Kenanga Research said the ongoing spike of local COVID-19 infections, which has led to renewed lockdown measures in some areas, will likely impede economic recovery.

In turn, it expects an uneven recovery in confidence among households and businesses, which will limit loan growth.

Hence, it is maintaining a loan growth forecast of between 1.0 per cent and 2.0 per cent this year compared with 3.9 per cent last year.

“We expect Bank Negara Malaysia (BNM) to maintain the overnight policy rate (OPR) at 1.75 per cent.

“However, considering the reimplementation of lockdown restrictions and the rise of COVID-19 cases, we believe there is still room to cut the OPR should the need arises,” it said in a note today.

Kenanga Research said the impact of the end of the loan moratorium period in September was not as bad as feared.

It said the industry’s loan growth stood at 4.4 per cent at the end of August and September. By segment, household loans improved from 4.8 per cent year-on-year in August 2020 to 5.2 per cent year-on-year in September 2020.

This offset the slowdown in business loan growth from 3.3 per cent year-on-year in August 2020 to 2.7 per cent year-on-year in September 2020, it added.

In September, the system gross impaired loan (GIL) was down 6.0 per cent, loan loss coverage (LLC) jumped to 105 per cent from 81 per cent at end-Dec 2019, while liquidity was ample with year-on-year deposit growth at 5.9 per cent.

In addition, Kenanga Research said the system loan to deposit ratio (LDR) eased to 87 per cent (December 2019: 89 per cent), while liquidity coverage ratio (LCR) rose to 152 per cent from 149 per cent at end-2019; and CET-1 ratio was up 30 basis points from end-2019 to 14.6 per cent as banks conserved capital.

Meanwhile, Maybank Investment Bank Research said despite improved loan growth in September 2020, driven by strength in mortgage and auto loan, business loan demand was weak.

“September marked the end of the blanket loan moratorium but with a targeted moratorium still in place.

“The resumption of loan repayments will likely dampen overall loan growth numbers, but more critical to monitor will be asset quality data,” it said today.

The research house believes the rate of asset quality deterioration is expected to be gradual, given that the loan moratorium has been extended by another three months for individuals who have lost their jobs while those who have seen a reduction in salaries may apply for reduced monthly instalment payments.

It said absolute GIL declined by RM0.2 billion and the industry’s GIL ratio was a lower 1.38 per cent at end-Sep 2020 versus 1.4 at end-Aug 2020, and a 2020 high of 1.59 per cent at end-March 2020.

BNM expects the system’s GIL ratio to peak in the second half of 2021 at 4.1 per cent.

Maybank Investment Bank Research sees that upside risks for the sector include stronger-than-expected gross domestic product (GDP) growth, which would contribute to stronger loan growth and lower credit risks, as well as improved liquidity, which would help sustain interest margins.

However, downside risks for the industry include weaker-than-expected economic growth, which could lead to slower loan growth and asset quality issues; potential interest rate cuts that could negatively impact interest margins in the short term; and a slowdown in current account savings account (CASA) growth, which could exacerbate deposit competition.

Meanwhile, CGS-CIMB Securities Sdn Bhd said it was overall negative on the September 2020 financial highlights by Bank Negara Malaysia as the expected higher third-quarter 2020 (Q3) loan loss provision (LLP) would more than offset the positive impact from stronger loan growth.

It said banks’ LLP is likely to increase further in Q3 from the all-time high of RM3.98 billion in Q2.

“We deduce this, given the wider increase in the industry’s total provision of RM1.86 billion in Q3 versus RM1.63 billion in Q2.

“If this is the case, banks’ 3Q20 net profit would have declined by around 30 per cent year-on-year.

“Any deviation in the actual trend in Q3 LLP versus our expectation would have come from banks’ LLP for their overseas loans,” it added.

Having said that, CGS-CIMB said it raised the projected loan growth for 2020 from 3.0 per cent to 4.0 per cent due to stronger-than-expected loan expansion of 3.0 per cent in September 2020 and expected loan growth in the fourth quarter.

In 2021, it said net profit is projected to grow by 14.8 per cent, which is a potential re-rating catalyst underpinning its “overweight” call for the sector.