Banking Sector 1 Oct 2018 BANKING SECTOR. Rationale for report: Jan 2020 BNM statistics

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Investment Highlights

Industry loan growth decelerated to 3.5% YoY in Jan 2020 (Dec 2019: 3.9% YoY). The moderation in the system loan growth was contributed by a slower non-household loan growth to 2.0% YoY (Dec 2019: 2.0% YoY) while household loan growth slipped to 4.5% YoY, 20bps lower than the previous month. Repayments outpaced disbursements in Jan 2019, reversing ythe trend seen in Dec 2019. For 2020, our loan growth projection is unchanged at 4.0%.

Slowdown in loan applications and approvals in Jan 2020. Jan 2020 saw a slower pace of loan applications and approvals for both the household and non-household sectors.

Headwinds ahead on banks’ interest income with potentially another interest rate cut of 25bps in 1H 2020. Following the announced OPR cut of 25bps on 22 Jan 2020, the sector's weighted base rate and average lending rate declined to 3.42% and 5.02% respectively. Also, the BLR was reduced to 6.50%. We expect NIMs of banks to be compressed again in 1Q20 though mitigated partially by the marked-to-market gains on banks’ securities due to the compression in bond yields. In Jan 2020, the 10- year MGS yields declined by 18bps to 3.13% as investor sentiment was impacted by the Covid-19 outbreak leading to a higher risk aversion.

Expect another cut of 25bps, reducing the OPR further to 2.50% from 2.75% in 1H 2020 after the Jan 2020 rate reduction of 25bps. Themarket appears to have priced in another rate cut of at least 25bps based on the difference in rate between the interest rate swap and KLIBOR. We expect a further cut in OPR by 25bps either today (3 March 2020) after the monetary policy committee (MPC) meeting or the next MPC meeting on 5 May 2020. We have already pencilled in the impact of a 50bps rate reduction into the earnings of banks. Regionally, Thailand and the Philippines have instituted rate cuts with the latest Indonesia cutting its benchmark interest rate by 25bps to 4.75% to counter Covid-19 from slowing down the economic growth.

Higher impaired loans and provisions in Jan 2020. The industry’s outstanding impaired loans in Jan 2020 increased by 2.8% MoM or RM761mil. This has raised the industry’s total GIL ratio back to 1.6% while NIL ratio rose to 1.00% vs. 0.96% in the previous month. Total provisions for the sector were marginally higher by 0.3% MoM or RM73.4bil.

Rerated CIMB to HOLD from BUY and downgrading the sector to NEUTRAL from OVERWEIGHT. In the recent results reporting season, we have downgraded CIMB to a HOLD on weaker 4Q19 numbers and lower ROE for FY20 after imputing the impact of another rate cut of 25bps. There remains downside risk to the economic growth from: i) unresolved US and China trade tensions though the signing of phase one deal; ii) Covid-19 if the virus outbreak will be a protracted one; and iii) domestic political uncertainties. With these uncertainties, we favour banks with: i) lower foreign shareholdings for stability; ii) higher dividend yields; iii) larger securities book to benefit from marked-to-market gains with the decline in bond yields to mitigate the OPR cuts on NIM; iv) the ability to recover fast from repricing of deposits to lower rates from cuts in benchmark interest rates; and v) stable asset quality (higher security coverage for loans). Our top picks are Maybank(FV: RM9.50/share), RHB Bank(FV: RM6.30/share) and Hong Leong Bank (FV: RM17.50/share). Maybank, RHB Bank and Hong Leong have lower foreign shareholdings of 19.3%, 21.4% (excluding Aabar’ stake of 4.23%) and 11.4% respectively compared to Public Bank (32.8%), and CIMB (30.4%).

Sector report

BANKING SECTOR

Softer loans growth; slowdown in loan applications

3 Mar 2020

NEUTRAL

Kelvin Ong, CFA

kelvin-ong@ambankgroup.com 03-2036 2294

(Downgraded)

Rationale for report: Jan 2020 BNM statistics

EXHIBIT 1: VALUATION MATRIX

BV BV PBV PBV

20 21 20 21 20 21 20 21 20 21 20 21

AMMB NR 3.63 - 48.1 48.8 7.5 7.4 21.1 22.1 5.8 6.1 6.1 6.3 0.6 0.6

Maybank BUY 8.39 9.50 74.2 76.7 11.3 10.9 57.1 59.0 6.8 7.0 7.5 8.0 1.1 1.0

Public Bank HOLD 17.08 19.00 140.5 148.4 12.2 11.5 70.3 74.2 4.1 4.3 12.0 12.7 1.4 1.3

RHB Bank BUY 5.49 6.30 62.9 67.3 8.7 8.2 31.4 33.6 5.7 6.1 6.9 7.3 0.8 0.8

Hong Leong BUY 15.02 17.50 132.0 140.8 11.4 10.7 52.8 56.4 3.5 3.8 13.5 14.6 1.1 1.0

CIMB HOLD 4.60 5.30 48.9 54.2 9.4 8.5 26.2 29.0 5.7 6.3 6.1 6.4 0.8 0.7

ABMB HOLD 2.23 2.60 27.8 32.0 8.0 7.0 13.3 15.3 6.0 6.9 3.8 3.8 0.6 0.6

BIMB BUY 3.73 4.60 48.4 52.4 7.7 7.1 17.8 19.3 4.8 5.2 3.6 4.2 1.0 0.9

MBSB BUY 0.76 0.93 11.2 11.8 6.7 6.4 5.0 5.0 6.6 6.6 1.3 1.4 0.6 0.5

Average 66.0 70.3 9.2 8.6 32.8 34.9 5.4 5.8 6.8 7.2 0.9 0.8

Forecasts by AmInv estment Bank

Net DPS Net DivYield

Rec. 2-Mar

Target Price

EPS (sen) PER

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INDUSTRY LOAN GROWTH DECELERATED TO

3.5% YOY IN JAN 2020 AFTER PICKING UP PACE

IN DEC 2019

Industry loan growth slipped to 3.5% YoY in Jan

2020 due to slowdown in household and non-household loans

Growth in household loans was slower at 4.5% YoY while non-household loan growth declined to 2.0% YoY after to climbing to 2.7% YoY in the preceding month. Jan 2020 saw loan repayments outpacing disbursements. For business loans, repayments were faster compared to disbursements. This was a reverse of Dec 2019 which saw higher disbursements of loans to the manufacturing and agriculture sectors.

Slower non-household loan growth in Jan 2020

Non-household loan growth eased to 2.0% YoY in Jan 2020 vs. 2.7% YoY in Dec 2019. Loans to the manufacturing, wholesale, retail, restaurants and hotels, real estate, transport, storage and communication and the financing, insurance and business services sectors moderated.

Slightly softer household loan growth; slowdown

in pace of loans for purchase securities, residential property and personal loans

Household loan growth dipped to 4.5% YoY in Jan 2020 compared to 4.7% YoY in Dec 2019. Mortgage, personal and loans for purchase of securities registered a softer growth compared to the previous month. Meanwhile, HP loans continued to the subdued. On credit cards, growth in outstanding receivables rose in Jan 2020.

EXHIBIT 2: INDUSTRY LOAN GROWTH (% YOY)

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% Ja n-07 Ju l-0 7 Ja n-08 Ju l-0 8 Ja n-09 Ju l-0 9 Ja n-10 Ju l-1 0 Ja n-11 Ju l-1 1 Ja n-12 Ju l-1 2 Ja n-13 Ju l-1 3 Ja n-14 Ju l-1 4 Ja n-15 Ju l-1 5 Ja n-16 Ju l-1 6 Ja n-17 Ju l-1 7 Ja n-18 Ju l-1 8 Ja n-19 Ju l-1 9 Ja n-20

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EXHIBIT 3: GROWTH IN LOANS, APPLICATIONS AND APPROVALS (% YOY)

Total Household Business Total Household Business Total Household Business Total Household Business Total Household Business

Jan-16 7.7% 7.6% 7.7% 10.7% -3.7% 33.7% -13.9% -27.7% 9.9% 2.2% -1.0% 3.5% 2.3% 3.4% 2.0% Feb-16 7.4% 7.0% 7.9% 4.5% -0.8% 11.1% -17.4% -23.5% -9.4% 2.2% -4.5% 5.1% 7.4% 11.6% 5.8% Mar-16 6.4% 6.4% 6.5% 3.3% 3.7% 2.8% -20.8% -20.7% -21.0% -5.7% -11.1% -3.5% 3.2% 6.3% 2.0% Apr-16 6.3% 6.3% 6.2% -6.2% 0.7% -14.4% -17.3% -23.9% -7.8% -0.5% -6.8% 2.2% 5.5% 0.0% 7.7% May-16 6.2% 6.2% 6.1% 10.0% 4.7% 15.8% 4.9% -12.0% 26.5% 8.7% 2.6% 11.1% 13.8% 13.7% 13.9% Jun-16 5.6% 6.0% 5.0% 3.8% -6.0% 15.2% -21.7% -15.9% -27.8% -8.7% -4.3% -10.2% -2.3% 1.5% -3.6% Jul-16 5.1% 5.7% 4.3% -17.8% -14.1% -21.6% -18.6% -20.6% -16.2% -10.2% -8.9% -10.8% -6.8% -3.2% -8.1% Aug-16 4.2% 5.7% 2.2% -1.0% 11.2% -12.7% 1.2% -0.3% 3.0% -5.4% 5.0% -9.3% 4.4% 9.2% 2.6% Sep-16 4.2% 5.6% 2.3% -7.0% -1.7% -12.5% -5.6% -6.5% -4.4% -6.4% -1.9% -7.9% -7.0% 3.2% -10.3% Oct-16 4.5% 5.5% 3.2% -14.5% -4.8% -23.6% -3.9% -12.3% 5.7% -1.9% -7.4% 0.4% -1.8% 0.4% -2.6% Nov-16 5.3% 5.4% 5.2% 0.0% 6.3% -6.2% -3.8% 0.2% -8.3% 9.6% 0.4% 13.4% -0.8% 6.7% -3.3% Dec-16 5.3% 5.3% 5.3% -7.3% -6.5% -8.2% -12.8% -14.3% -11.5% -4.4% -6.1% -3.8% -0.7% -0.1% -0.9% Jan-17 5.6% 5.2% 6.1% -8.1% -3.1% -13.8% -4.4% 5.1% -15.2% 3.4% 2.4% 3.8% -0.2% 4.8% -2.0% Feb-17 5.3% 5.1% 5.6% 22.1% 24.0% 20.1% 17.3% 15.5% 19.4% 3.3% -0.7% 4.9% 7.0% 4.8% 7.9% Mar-17 6.0% 5.2% 6.9% 7.3% 15.2% -2.1% 32.0% 19.1% 48.4% 15.5% 8.0% 18.3% 10.4% 4.9% 12.5% Apr-17 6.1% 5.1% 7.5% 1.5% 3.8% -1.7% 1.9% 11.0% -9.0% 2.6% -0.6% 3.9% 1.3% 2.1% 1.0% May-17 5.5% 5.1% 6.1% 5.1% 21.1% -10.8% -1.8% 23.4% -24.1% -1.8% 13.1% -7.3% 4.4% 9.7% 2.3% Jun-17 5.7% 5.1% 6.5% -14.8% -1.8% -27.2% 11.6% 0.0% 25.5% 3.2% 0.6% 4.2% 3.1% 2.7% 3.3% Jul-17 5.6% 5.1% 6.3% 22.9% 28.6% 16.6% 24.8% 26.4% 23.1% 13.2% 9.1% 15.0% 16.1% 10.6% 18.2% Aug-17 5.8% 5.0% 6.8% 4.1% 9.0% -1.9% 9.9% 9.2% 10.7% 15.1% 7.2% 18.5% 12.6% 8.6% 14.2% Sep-17 5.2% 5.0% 5.4% 0.5% 3.1% -2.6% -1.4% -2.2% -0.4% -1.3% 3.9% -3.2% 6.0% 4.8% 6.4% Oct-17 4.6% 5.1% 4.0% 12.8% 12.2% 13.5% -2.2% 9.9% -13.6% 8.5% 14.8% 6.0% 17.8% 14.9% 18.9% Nov-17 3.9% 5.2% 2.3% 15.8% 12.6% 19.5% 22.3% 15.2% 31.2% 2.0% 14.2% -2.6% 10.6% 10.9% 10.5% Dec-17 4.1% 5.1% 2.8% -2.1% 6.8% -12.5% 17.4% 12.6% 21.5% 2.3% 8.0% 0.4% -2.3% 9.7% -6.1% Jan-18 4.2% 5.3% 2.7% 25.4% 26.3% 24.3% 26.9% 22.7% 32.8% 3.2% 16.4% -1.9% 1.5% 13.6% -2.9% Feb-18 4.5% 5.6% 3.1% -5.8% -4.5% -7.2% -4.4% 10.7% -20.5% 6.7% 19.6% 1.9% 2.7% 13.5% -1.4% Mar-18 4.4% 5.6% 2.8% 0.0% -8.0% 11.2% -7.6% -3.5% -11.8% -1.5% 5.9% -4.1% 0.4% 8.1% -2.3% Apr-18 6.9% 8.6% 4.6% 22.0% 10.7% 38.2% 22.7% 10.7% 40.1% 11.7% 18.7% 9.0% 8.7% 16.0% 6.1% May-18 7.0% 8.5% 5.0% -6.8% -11.1% -1.0% 1.7% -10.2% 18.9% 3.1% -4.3% 6.4% 4.3% -0.2% 6.2% Jun-18 7.1% 8.6% 5.1% 14.2% 10.3% 19.3% 7.1% 13.7% 0.7% 15.0% 10.4% 16.7% 13.5% 8.1% 15.5% Jul-18 7.4% 8.9% 5.4% 3.4% 15.7% -11.9% 2.1% 13.0% -10.3% 13.7% 17.5% 12.2% 11.9% 13.1% 11.4% Aug-18 7.5% 9.0% 5.5% 6.4% 4.6% 8.8% 1.5% 7.9% -6.2% 3.5% 5.8% 2.5% 2.9% 3.2% 2.8% Sep-18 7.8% 8.9% 6.5% 7.3% -3.4% 20.5% 26.5% 3.1% 54.8% 12.0% 2.3% 15.7% 7.2% 4.6% 8.1% Oct-18 8.1% 8.8% 7.2% 1.6% 6.0% -3.5% 17.4% 11.4% 24.7% 12.4% 2.8% 16.3% 9.1% 4.7% 10.7% Nov-18 8.3% 8.5% 7.9% -23.4% -13.6% -33.7% -5.2% -10.0% 0.0% 5.5% -6.1% 10.6% 4.4% -1.4% 6.5% Dec-18 7.7% 8.3% 6.8% 6.0% 0.1% 14.4% -8.8% 1.9% -17.4% 12.1% 8.0% 13.6% 21.4% 9.4% 25.9% Jan-19 7.5% 8.2% 6.6% -3.8% -2.9% -5.1% -3.3% -0.2% -7.2% 10.4% 0.8% 14.8% 13.5% 3.2% 18.0% Feb-19 7.0% 7.9% 5.8% -13.6% -7.9% -20.3% -3.0% -8.9% 5.8% -3.1% -6.9% -1.5% 3.1% -1.7% 5.2% Mar-19 7.0% 8.0% 5.6% -5.3% -3.0% -8.0% 6.9% 2.8% 11.4% 3.2% 2.7% 3.4% 4.9% -1.0% 7.2% Apr-19 4.5% 5.1% 3.8% 5.4% 1.0% 10.5% 5.7% 9.6% 1.2% 8.7% 5.6% 10.0% 13.4% 7.1% 16.0% May-19 4.5% 5.1% 3.7% 13.3% 16.7% 9.1% 25.4% 23.2% 27.7% 12.2% 12.8% 11.9% 8.3% 8.8% 8.1% Jun-19 4.2% 4.9% 3.3% -11.7% -10.2% -13.4% -3.3% -6.3% -0.1% -11.8% -5.8% -13.8% -8.6% 2.0% -12.2% Jul-19 3.9% 4.7% 2.9% 0.5% -7.5% 13.5% 10.6% 5.5% 19.3% 1.8% 0.9% 2.2% 4.5% 5.4% 4.1% Aug-19 3.9% 4.6% 2.9% -0.3% -8.9% 10.9% 0.2% -2.8% 8.0% 1.0% 2.1% 0.6% 0.9% 2.7% 0.2% Sep-19 3.8% 4.6% 2.7% -6.1% -0.8% -11.3% -8.7% 3.0% -18.1% -1.7% 13.0% -6.6% -4.5% 3.2% -7.2% Oct-19 3.7% 4.7% 2.4% 3.2% -1.2% 8.8% -12.8% -3.0% -23.2% -7.9% 5.9% -12.9% -7.8% 4.1% -11.8% Nov-19 3.7% 4.7% 2.4% 26.4% 5.7% 55.0% 2.8% 3.3% 2.4% -1.7% 4.8% -4.2% -1.4% 5.3% -3.7% Dec-19 3.9% 4.7% 2.7% 5.5% 9.7% 0.3% 7.6% 4.6% 10.5% 0.5% 0.8% 0.4% -2.2% 1.7% -3.4% Jan-20 3.5% 4.5% 2.0% -14.6% -18.3% -9.5% -4.9% -13.2% 6.6% -4.3% -1.1% -5.6% 2.5% 5.3% 1.5%

Loan Repayments (%YoY) Outstanding Loans (%YoY) Loans Applied (%YoY) Loans Approved (%YoY) Loans Disbursed (%YoY)

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EXHIBIT 4: NON-HOUSEHOLD AND HOUSEHOLD LOAN GROWTH

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% Ja n-07 Ju l-07 Ja n-08 Ju l-08 Ja n-09 Ju l-09 Ja n-10 Ju l-10 Ja n-11 Ju l-11 Ja n-12 Ju l-12 Ja n-13 Ju l-13 Ja n-14 Ju l-14 Ja n-15 Ju l-15 Ja n-16 Ju l-16 Ja n-17 Ju l-17 Ja n-18 Ju l-18 Ja n-19 Ju l-19 Ja n-20

Household loan growth Non-household loan growth

Source: BNM, AmInvestment Bank Bhd

EXHIBIT 5: LOAN BREAKDOWN BY PURPOSE (RM MIL)

Source: BNM, AmInvestment Bank Bhd

Jan-19 Dec-19 Jan-20 % of total %MoM %YoY

Purchase of securities 80,897 83,721 84,160 4.8% 0.5% 4.0%

Purchase of transport vehicles 168,803 167,251 167,331 9.5% 0.05% -0.9%

of which : purchase of passenger cars 159,930 158,526 158,660 9.0% 0.1% -0.8% Purchase of residential property 566,669 604,342 607,471 34.3% 0.5% 7.2% Purchase of non-residential property 218,717 225,168 225,376 12.7% 0.1% 3.0%

Purchase of fixed asset other than land & building

10,424 12,508 12,366 0.7% -1.1% 18.6% Personal use 95,634 97,356 97,360 5.5% 0.0% 1.8% Credit card 38,872 41,192 41,111 2.3% -0.2% 5.8% Purchase of consumer durables 106 93 89 0.01% -4.3% -16.0% Construction 56,190 59,472 59,639 3.4% 0.3% 6.1% Working capital 394,243 397,296 392,584 22.2% -1.2% -0.4% Other purpose 80,516 83,191 83,008 4.7% -0.2% 3.1% Total 1,711,070 1,771,591 1,770,493 100.0% -0.1% 3.5%

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EXHIBIT 6: LOAN BREAKDOWN BY SECTOR (RM MIL)

Jan-19 Dec-19 Jan-20 % of total %MoM %YoY

Primary agriculture 35,154 35,958 36,160 2.0% 0.6% 2.9%

Mining and quarrying 10,410 10,332 10,122 0.6% -2.0% -2.8%

Manufacturing (including agro

based) 112,525 121,628 120,452 6.8% -1.0% 7.0%

Electricity, gas and water

supply 13,233 15,849 15,964 0.9% 0.7% 20.6%

Wholesale, retail, restaurants &

hotels 124,631 131,179 129,540 7.3% -1.2% 3.9%

Construction 88,844 91,195 91,521 5.2% 0.4% 3.0%

Real estate 116,786 115,675 114,329 6.5% -1.2% -2.1%

Transport, storage &

communication 38,473 39,650 39,861 2.3% 0.5% 3.6%

Financing, insurance &

business services 117,831 117,415 115,829 6.5% -1.4% -1.7%

Education, health & others 40,464 40,254 41,398 2.3% 2.8% 2.3%

Household sector 988,762 1,030,448 1,033,404 58.4% 0.3% 4.5%

Other sector 23,957 22,008 21,913 1.2% -0.4% -8.5%

Total 1,711,070 1,771,591 1,770,493 100.0% -0.1% 3.5%

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LOAN APPLICATIONS

Slowdown in household and non-household loan

applications

In Jan 2020, the growth of industry loan applications fell to -14.6% YoY compared to 5.5% YoY in Dec 2019. Household and non-household loan applications registered a weaker growth in Jan 2020.

EXHIBIT 7: LOAN APPLICATIONS (RM MIL)

-30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 Ja n-17 F e b-1 7 Ma r-1 7 A pr -1 7 May -17 Ju n-17 Ju l-17 A ug-17 S ep-17 O ct-1 7 N ov -17 D ec -17 Ja n-18 F e b-1 8 Ma r-1 8 A pr -1 8 May -18 Ju n-18 Ju l-18 A ug-18 S ep-18 O ct-1 8 N ov -18 D ec -18 Ja n-19 F e b-1 9 Ma r-1 9 A pr -1 9 May -19 Ju n-19 Ju l-19 A ug-19 S ep-19 O ct-1 9 N ov -19 D ec -19

Loan Applications (RM Mil) (LHS) YoY growth (%) (RHS)

(7)

7

LOAN APPROVALS

Slowdown in household and non-household loan

approvals

Growth in industry loan approvals fell to -4.9% YoY vs. 7.6% YoY in Dec 2019 contributed by slower household and non-household loan approvals. By loan purpose, the slowdown was broad-based across most segments. By sector, it was mainly contributed by slower approvals of loans to the agriculture, mining and quarrying,

manufacturing, construction, transport, storage and communication and the household segments.

EXHIBIT 8: LOAN APPLICATIONS BY PURPOSE (RM MIL)

Jan-20 % of total Aug-19 (%YoY) Sept-19 (%YoY) Oct-19 (%YoY) Nov-19 (%YoY) Dec-19 (%YoY) Jan-20 (%YoY) Purchase of securities 3,032 4.9% 46.6% -38.0% 74.9% 18.2% -54.4% -39.2%

Purchase of transport vehicles 6,339 10.3% -21.3% 11.6% 12.8% 32.7% 29.9% -9.9%

of which : purchase of passenger cars 6,125 10.0% -24.4% 11.1% 15.7% 34.0% 30.5% -9.5% Purchase of residential property 16,012 26.1% -3.8% 5.1% 5.0% 8.3% 15.1% -19.6% Purchase of non-residential property 6,641 10.8% 3.1% 5.3% -4.0% 14.2% 5.1% -27.1%

Purchase of fixed asset other than land & building

404 0.7% -61.9% 5.1% -9.5% 189.3% -9.7% -58.3% Personal use 5,455 8.9% -7.8% -0.7% -4.1% 7.4% 5.2% -9.4% Credit card 3,475 5.7% -20.5% -20.6% -21.4% 7.2% 0.6% -0.8% Purchase of consumer durables 0 0.0% -50.0% -10.0% 12.5% 83341.7 % -97.2% 57.1% Construction 2,972 4.8% 32.4% -23.0% -0.1% 90.6% 50.1% -30.4% Working capital 14,130 23.0% 38.8% 4.9% 9.2% 40.1% 12.3% 13.3% Other purpose 2,948 4.8% -42.5% -55.7% -28.8% 89.8% -39.2% -17.4% Total applied 61,407 100.0% -0.3% -6.1% 3.2% 26.4% 5.5% -14.6%

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Stable deposit growth

Industry deposit growth remained stable at 2.9% YoY. Growth of deposits from individuals moderated to 5.2% YoY while that of business enterprises registered a lower contraction of -0.9% YoY compared -1.4% YoY in the preceding month. Loan growth slowed down, hence the LD ratio for the sector rose to 89.1% vs. 88.6% in Dec 2019. The sector’s loan-to-fund ratio increased modestly to 83.4% while the loan-to-fund and equity ratio stood at 72.6%.

Industry CASA growth contracted to 5.6% YoY from 6.7% YoY in Dec 2019, leading to slightly lower CASA ratio of 26.4%.

Sector LCR was higher at 151.0%. This was contributed by the higher LCR of commercial banks and investment banks at 151.0% and 177.0% respectively. Meanwhile, LCR of Islamic banks stood at 150.0%

EXHIBIT 9: LOAN APPROVALS (RM MIL)

-15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 Jan-17 F eb-1 7 M ar -17 A pr -17 M ay -17 Jun-17 Jul -17 A ug-17 S ep-17 O ct -17 N ov -17 D ec -17 Jan-18 F eb-1 8 M ar -18 A pr -18 M ay -18 Jun-18 Jul -18 A ug-18 S ep-18 O ct -18 N ov -18 D ec -18 Jan-19 F eb-1 9 M ar -19 A pr -19 M ay -19 Jun-19 Jul -19 A ug-19 S ep-19 O ct -19 N ov -19 D ec -19 Jan-20

Loan approvals (RM'Mil) (LHS) YoY Growth (%) (RHS)

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LENDING AND DEPOSIT RATES

Weighted average lending and base rates fell

following OPR cut of 25bps on 22 Jan 2020

The sector's weighted base rate and average lending rate declined to 3.43% and 5.02% respectively after the central bank announced a further reduction to the OPR by 25bps to 2.75% on 22 Jan 2020. The BLR declined 21bps to 6.50%.

The average deposit rate (the average rates for FDs of up to 1-year tenure) declined to 2.74%. Interest spread (difference between weighted average lending rate and average FD rate) was 2.28%. Margins of banks will be compressed again in 1Q20 owing to the recent OPR cut of 25bps on 22 Jan 2020. The impact of the OPR will be mild on the NIMs and net profits of banks. The margin

compression will be 3–6 months before recovering from the adjustment of the rates of matured FDs lower. In the last OPR cut in May 2019, most banks NIMs have recovered by a short as 3 months.

We are expecting another reduction in OPR by 25bps to 2.50% in the 1H 2020. This could occur either today (3 March 2020) after the monetary policy committee meeting or the next MPC meeting on 5 May 2020. The market appears to have priced in another rate cut of at least 25bps based on the difference in rate between the interest rate swap and KLIBOR.

Inflation rose slightly but remained low with a CPI of 1.6%.

EXHIBIT 10: LOAN APPROVALS BY PURPOSE (RM MIL)

Jan-20 % of total Aug-19 (%YoY) Sept-19 (%YoY) Oct-19 (%YoY) Nov-19 (%YoY) Dec-19 (%YoY) Jan-20 (%YoY) Purchase of securities 1,597 5.4% 50.4% -23.7% -26.6% 16.4% -1.2% -36.5%

Purchase of transport vehicles 4,042 13.7% -27.8% 2.9% 5.9% 19.1% 20.0% -1.9%

of which : purchase of passenger cars 3,890 13.2% -28.6% -0.5% 6.9% 20.2% 20.5% -1.2% Purchase of residential property 7,055 23.9% 6.3% 3.8% -2.6% 3.8% 8.5% -14.2% Purchase of non-residential property 2,177 7.4% -26.1% -16.9% -11.7% -3.6% 23.5% -13.0%

Purchase of fixed asset other

than land & building 439 1.5% 93.2% -79.6% 42.3% 19.7% -27.8% 8.4%

Personal use 1,921 6.5% 13.4% 19.4% -1.4% 12.5% 9.0% 2.9% Credit card 1,520 5.1% -7.7% -3.5% 0.0% 28.7% 20.0% 13.5% Purchase of consumer durables 0 0.0% -77.3% -31.8% 12.5% 8.3% na 175.0% Construction 2,304 7.8% 97.6% 59.3% 39.8% 50.0% 59.5% 54.9% Working capital 7,051 23.9% -6.9% 20.6% -26.1% 25.8% -14.5% -1.0% Other purpose 1,432 4.8% 13.8% -73.2% -65.8% -59.2% 46.8% -3.7% Total approved 29,538 100.0% 0.2% -8.7% -12.8% 2.8% 7.6% -4.9%

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EXHIBIT 11: TREND OF BLR, AVERAGE LENDING RATE AND 3-MONTH FD RATE

Source: BNM, AmInvestment Bank Bhd

EXHIBIT 12: DIFFERENCE IN BANKS’ BASE RATE AND AVERAGE FD RATE

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 M ar -1 5 Ju n-15 S ep -1 5 D ec -1 5 M ar -1 6 Ju n-16 S ep -1 6 D ec -1 6 M ar -1 7 Ju n-17 S ep -1 7 D ec -1 7 M ar -1 8 Ju n-18 S ep -1 8 D ec -1 8 M ar -1 9 Ju n-19 S ep -1 9 D ec -1 9

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11

EXHIBIT 13: GROSS IMPAIRED LOANS (RM MIL)

24,573 24,892 25,276 26,253 26,761 26,835 26,788 27,068 26,238 26,200 25,862 25,245 25,330 26,171 25,301 26,218 26,398 27,124 27,597 27,933 28,178 28,305 28,071 26,777 27,538 22,000 23,000 24,000 25,000 26,000 27,000 28,000 29,000 Jan -18 F eb -18 Mar -18 A pr -18 May -18 Jun -18 Jul -18 A ug-18 S ep-18 O ct-18 N o v-18 D e c-18 Jan -19 F eb -19 Mar -19 A pr -19 May -19 Jun -19 Jul -19 A ug-19 S ep-19 O ct-19 N o v-19 D e c-19 Jan -20

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EXHIBIT 14: GROSS IMPAIRED LOANS (RM MIL)

Jan-19 Dec-19 Jan-20 % of total %MoM %YoY

Purchase of securities 300 202 222 0.8% 9.9% -26.0%

Purchase of transport vehicles 1,611 1,293 1,337 4.9% 3.4% -17.0%

of which : purchase of

passenger cars 1,262 1,094 1,133 4.1% 3.6% -10.2%

Purchase of residential property 6,194 6,972 7,202 26.2% 3.3% 16.3%

Purchase of non-residential

property 3,003 3,086 3,173 11.5% 2.8% 5.7%

Purchase of fixed asset other

than land & building 251 279 326 1.2% 16.8% 29.9%

Personal use 1,738 1,667 1,722 6.3% 3.3% -0.9%

Credit card 338 358 360 1.3% 0.6% 6.5%

Purchase of consumer durables 14 8 2 0.01% -75.0% -85.7%

Construction 3,669 3,559 3,643 13.2% 2.4% -0.7%

Working capital 7,074 8,315 8,484 30.8% 2.0% 19.9%

Other purpose 1,137 1,039 1,068 3.9% 2.8% -6.1%

Total 25,330 26,777 27,538 100.0% 2.8% 8.7%

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EXHIBIT 15: GROSS IMPAIRED LOAN RATIOS BY LOAN PURPOSE (%)

Jun-19 July-19 Aug-19 Sept-19 Oct-19 Nov-19 Dec-19 Jan-20

Purchase of securities 0.3% 0.3% 0.3% 0.3% 0.3% 0.2% 0.2% 0.3% Purchase of transport vehicles 0.8% 1.0% 1.0% 1.0% 1.0% 1.0% 0.8% 0.8% of which : purchase of passenger cars 0.8% 0.8% 0.8% 0.7% 0.7% 0.7% 0.7% 0.7% Purchase of residential property 1.1% 1.1% 1.1% 1.2% 1.1% 1.1% 1.2% 1.2% Purchase of non-residential property 1.4% 1.4% 1.4% 1.5% 1.4% 1.4% 1.4% 1.4%

Purchase of fixed asset other than land &

building 2.7% 2.5% 2.6% 2.5% 2.5% 2.4% 2.2% 2.6% Personal use 1.7% 1.8% 1.8% 1.9% 1.9% 1.9% 1.7% 1.8% Credit card 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% Purchase of consumer durables 1.8% 2.4% 1.5% 1.6% 2.0% 2.0% 8.2% 1.8% Construction 6.2% 6.3% 6.4% 6.3% 6.3% 6.3% 6.0% 6.1% Working capital 2.2% 2.3% 2.3% 2.2% 2.3% 2.2% 2.1% 2.2% Other purpose 1.8% 1.4% 1.5% 1.5% 1.5% 1.3% 1.2% 1.3% Total 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.5% 1.6%

Source: BNM, AmInvestment Bank Bhd

EXHIBIT 16: GROSS IMPAIRED LOAN RATIOS BY SECTOR (%)

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20

Primary agriculture 0.7% 0.9% 0.7% 3.4% 3.4% 3.5% 3.5% 3.3% 3.2% 3.2% 3.3% 3.0% 3.0% Mining and quarrying 5.2% 6.4% 6.8% 6.0% 5.9% 6.0% 5.8% 5.6% 5.1% 4.6% 4.7% 4.3% 4.4% Manufacturing (including agro-based) 2.2% 2.2% 2.2% 2.1% 2.2% 2.9% 3.2% 3.4% 3.4% 3.4% 3.2% 2.9% 2.9% Electricity, gas and water supply 0.8% 0.9% 0.9% 0.9% 0.9% 1.1% 1.1% 1.3% 1.2% 1.2% 1.1% 0.9% 0.8% Wholesale & retail trade, and restaurants & hotels 1.9% 1.9% 1.9% 1.9% 1.8% 1.8% 1.7% 1.8% 1.9% 1.8% 1.8% 1.7% 1.7%

Construction 2.8% 3.4% 2.8% 2.8% 2.6% 2.6% 2.7% 2.7% 2.7% 2.9% 2.9% 2.9% 3.1%

T ransport, storage and communication 5.7% 5.7% 5.6% 5.9% 6.1% 6.1% 6.0% 5.7% 5.7% 5.7% 5.5% 4.7% 4.9% Finance, insurance and business activities 3.2% 3.2% 3.1% 3.3% 3.5% 3.2% 3.1% 2.9% 3.0% 2.9% 2.8% 2.6% 2.8% Education, health & others 1.2% 1.2% 1.1% 1.1% 1.1% 1.1% 1.2% 1.2% 1.2% 1.2% 1.2% 1.4% 1.4% Household sector 2 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.1% 1.1% 1.1% 1.0% 1.1% Other sector n.e.c 3.1% 3.1% 2.9% 2.9% 2.9% 2.9% 3.0% 2.9% 2.5% 2.8% 2.5% 2.4% 2.4%

Total non-performing/impaired loans 1.5% 1.5% 1.5% 1.5% 1.5% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.5% 1.6%

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ASSET QUALITY

Higher impaired loan balances increased GIL

ratio back to 1.6%

The industry’s outstanding impaired loans in Jan 2020 rose by 2.8% MoM or RM761mil. By loan purpose, the decline was largely driven by higher impairment of loans for purchase of securities, transport vehicles, mortgages, personal, construction and working capital loans. By sector, we observed the upticks were from the agriculture, utilities, construction, transports, storage and communication and the household segments.

The industry’s total GIL increased back 1.6% after improving to 1.5% in Dec 2019 while NIL ratio rose to 1.00% vs. 0.96% in the previous month. Total provisions for the sector were marginally higher by 0.3% MoM or RM73.4bil. With the uptick in impaired loans, the sector’s loan loss cover decreased to 87.4% compared to 89.6% in Dec 2019.

A moratorium period (6 months) has been granted by banks to borrowers (individuals or companies) affected by Covid-19 to defer repayments or to restructure or reschedule their loans without needing to classify these loans as impaired. This will keep the asset quality stable for the time being. As it is still in the early stage with banks starting to receive applications requesting for indulgence on repayments, the impact is still unclear at this stage. Some banks have highlighted that the direct exposure to sectors affected by Covid-19 is around 2– 3% of total loans. In the event that the Covid-19 turns

out to be a protracted one surpassing 6 months, we see

some downside risk on bank’s asset quality and provisions.

CAPITAL RATIO

Stronger capital ratios

The sector's CET1, Tier 1 and total capital ratios all rose 10bps MoM to 14.4%, 14.9% and 18.4% respectively.

OTHER TRENDS

10-year MGS yield slipped by 18bps MoM as

investors turned more risk adverse after outbreak of Covid-19

The market indicative yield for the 10-year MGS declined by 18bps MoM to 3.13%. This is expected to increase the revaluation gains on banks’ securities portfolio to partially mitigate the NIM compression from the OPR cut of 25bps announced on the 22 Jan 2020.

New issuance of bonds/sukuks dominating

capital market activities in Jan 2020

YTD net funds raised in the market by the private sector were RM2.35bil, registering a decline of 61.5% YoY. Dec 2019 saw higher new issuance for bonds/sukuks while equity capital market activities continued to be soft.

EXHIBIT 17: PROVISIONS AND LOAN LOSS COVERAGE FOR THE SECTOR

Impaired Loans (RM Mil) Increase or Decrease in impairments MoM (RM Mil) Change MoM (%) Total Provisions (RM Mil) Increase or Decrease in provisions MoM (RM Mil) Change MoM (%) Loan loss coverage (%)

Jan-18 24,573.3 23,752.1 96.7% Feb-18 24,892.5 319.1 1.3% 24,169.1 417.0 1.8% 97.1% Mar-18 25,276.3 383.8 1.5% 23,985.4 -183.7 -0.8% 94.9% Apr-18 26,253.2 977.0 3.9% 25,435.6 1450.2 6.0% 96.9% May-18 26,761.0 507.8 1.9% 25,800.8 365.2 1.4% 96.4% Jun-18 26,834.8 73.8 0.3% 25,789.3 -11.5 0.0% 96.1% Jul-18 26,787.5 -47.3 -0.2% 26,328.2 538.8 2.1% 98.3% Aug-18 26,966.0 178.5 0.7% 26,186.8 -141.4 -0.5% 97.1% Sep-18 26,238.1 -727.9 -2.7% 25,804.2 -382.6 -1.5% 98.3% Oct-18 26,199.8 -38.3 -0.1% 25,775.1 -29.1 -0.1% 98.4% Nov-18 25,861.5 -338.2 -1.3% 25,747.2 -27.9 -0.1% 99.6% Dec-18 25,245.0 -616.5 -2.4% 25,006.1 -741.0 -2.9% 99.1% Jan-19 25,329.8 84.8 0.3% 24,980.2 -26.0 -0.1% 98.6% Feb-19 26,170.9 841.1 3.3% 25,225.2 245.0 1.0% 96.4% Mar-19 25,300.9 -870.1 -3.3% 24,904.7 -320.5 -1.3% 98.4% Apr-19 26,217.5 916.6 3.6% 24,854.6 -50.0 -0.2% 94.8% May-19 26,398.4 180.9 0.7% 24,841.2 -13.5 -0.1% 94.1% Jun-19 27,165.6 767.2 2.9% 24,749.2 -91.9 -0.4% 91.1% Jul-19 27,596.6 431.0 1.6% 25,109.6 360.4 1.5% 91.0% Aug-19 27,933.5 336.9 1.2% 25,219.8 110.2 0.4% 90.3% Sep-19 28,177.8 244.4 0.9% 25,052.0 -167.8 -0.7% 88.9% Oct-19 28,304.9 127.1 0.5% 25,231.9 180.0 0.7% 89.1% Nov-19 28,071.0 -233.9 -0.8% 25,095.7 -136.3 -0.5% 89.4% Dec-19 26,777.2 -1,293.8 -4.6% 24,003.0 -1092.7 -4.4% 89.6% Jan-20 27,538.3 761.1 2.8% 24,076.3 73.4 0.3% 87.4%

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EXHIBIT 18: DEPOSIT GROWTH (% YOY)

-20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Ja n -0 8 Au g-08 M ar -0 9 O ct -0 9 M ay -1 0 D ec -1 0 Ju l-11 F eb -1 2 S ep -1 2 Ap r-1 3 N o v-1 3 Ju n -1 4 Ja n -1 5 Au g-15 M ar -1 6 O ct -1 6 M ay -1 7 D ec -1 7 Ju l-18 F eb -1 9 S ep -1 9

Demand deposit growth FD growth Savings deposit growth

Source: BNM, AmInvestment Bank Bhd

EXHIBIT 19: CASA RATIO (%)

22.5% 23.0% 23.5% 24.0% 24.5% 25.0% 25.5% 26.0% 26.5% 27.0% 27.5% 28.0% Ja n-08 Ma y-08 S ep -0 8 Ja n-09 Ma y-09 S ep -0 9 Ja n-10 Ma y-10 S ep -1 0 Ja n-11 Ma y-11 S ep -1 1 Ja n-12 Ma y-12 S ep -1 2 Ja n-13 Ma y-13 S ep -1 3 Ja n-14 Ma y-14 S ep -1 4 Ja n-15 Ma y-15 S ep -1 5 Ja n-16 Ma y-16 S ep -1 6 Ja n-17 Ma y-17 S ep -1 7 Ja n-18 Ma y-18 S ep -1 8 Ja n-19 Ma y-19 S ep -1 9 Ja n-20

Source: BNM, AmInvestment Bank Bhd

EXHIBIT 20: DEPOSIT GROWTH BY HOLDER (% YOY)

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% M ay -0 8 O ct -0 8 M ar -0 9 A ug -0 9 Ja n-1 0 Ju n-1 0 N ov -1 0 A pr -1 1 S ep -1 1 F e b-1 2 Ju l-1 2 D ec -1 2 M ay -1 3 O ct -1 3 M ar -1 4 A ug -1 4 Ja n-1 5 Ju n-1 5 N ov -1 5 A pr -1 6 S ep -1 6 F e b-1 7 Ju l-1 7 D ec -1 7 M ay -1 8 O ct -1 8 M ar -1 9 A ug -1 9 Ja n-2 0

Deposit growth by holders (%Yoy)

Business enterprises deposit growth Individuals deposit growth

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EXHIBIT 21: CAPITAL RATIOS

10.0 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 19.0 Ja n-13 A pr -1 3 Ju l-13 O ct -1 3 Ja n-14 A pr -1 4 Ju l-14 O ct -1 4 Ja n-15 A pr -1 5 Ju l-15 O ct -1 5 Ja n-16 A pr -1 6 Ju l-16 O ct -1 6 Ja n-17 A pr -1 7 Ju l-17 O ct -1 7 Ja n-18 A pr -1 8 Ju l-18 O ct -1 8 Ja n-19 A pr -1 9 Ju l-19 O ct -1 9

Risk Weighted Capital Ratio (%) Core Capital Ratio (%) CET 1 Ratio (%)

Source: BNM, AmInvestment Bank Bhd

EXHIBIT 22: FOREIGN HOLDINGS OF MGS

14 6.7 14 5.7 15 1.4 15 7.6 15 8.2 166.8 165.4 157.4 15 3. 8 15 3.9 15 9.0 16 2.1 16 4.4 16 5.0 17 1.5 17 5.4 17 7. 1 18 2.1 18 5.3 18 6.9 18 1.4 18 4.6 17 3.0 16 8.5 16 6.4 15 8.9 13 5.9 14 1. 6 15 0.5 14 9.6 14 8.9 15 1.0 15 6.7 15 3.2 160.3 164.4 168.6 165.5 165.9 162.8 156. 9 15 0.9 15 4.4 15 3.9 14 8.3 15 3.0 14 7.6 14 6.2 14 4.4 14 9.3 15 0.7 14 7.1 14 3.4 14 9.1 15 4.7 15 3.7 15 4.2 15 3.8 15 8.4 16 3.9 16 7.2 43 .8 % 45 .1 % 4 5. 7 % 4 7. 0 % 46 .9 % 4 8. 5% 47 .8 % 46 .0 % 45 .6 % 4 6. 3 % 4 7. 3 % 47 .7 % 4 7. 9 % 4 7. 5 % 4 8. 7 % 4 9. 1 % 4 8. 7 % 4 9. 8 % 51 .9 % 51 .5 % 51 .3 % 5 1 .9 % 4 8. 4 % 4 7. 1 % 4 6. 0 % 4 4. 7 % 3 8. 5 % 39 .7 % 4 1. 8 % 41 .2 % 40 .1 % 4 0. 3 % 42.8 % 42 .7 % 44 .3 % 4 5. 1 % 45 .7 % 45 .4 % 4 5. 6 % 4 4. 3 % 41 .9 % 4 0. 1 % 4 0. 5 % 4 0. 0 % 3 9. 5 % 4 0. 7 % 3 8. 8 % 3 8. 4 % 37 .6 % 3 8. 3 % 3 8. 7 % 3 7. 1 % 35.8 % 3 6. 9 % 3 8. 3 % 3 7. 7 % 37 .5 % 37 .9 % 40 .5 % 4 1. 6 %

41

.7

%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0 200.0 Ja n-15 A pr -1 5 Ju l-1 5 O ct-15 Ja n-16 A pr -1 6 Ju l-1 6 O ct-16 Ja n-17 A pr -1 7 Ju l-1 7 O ct-17 Ja n-18 A pr -1 8 Ju l-1 8 O ct-18 Ja n-19 A pr -1 9 Ju l-1 9 O ct-19 Ja n-20

Securities Outstanding: MGS (Malaysia) RMbil

Debt Securities: Foreign Holding: Malaysian Government Securities (Malaysia) (%)

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DISCLOSURE AND DISCLAIMER

This report is prepared for information purposes only and it is issued by AmInvestment Bank Berhad (“AmInvestment”) without regard to your individual financial circumstances and objectives. Nothing in this report shall constitute an offer to sell, warranty, representation, recommendation, legal, accounting or tax advice, solicitation or expression of views to influence any one to buy or sell any real estate, securities, stocks, foreign exchange, futures, investment or other products. AmInvestment recommends that you evaluate a particular investment or strategy based on your individual circumstances and objectives and/or seek financial, legal or other advice on the appropriateness of the particular investment or strategy.

The information in this report was obtained or derived from sources that AmInvestment believes are reliable and correct at the time of issue. While all reasonable care has been taken to ensure that the stated facts are accurate and views are fair and reasonable, AmInvestment has not independently verified the information and does not warrant or represent that they are accurate, adequate, complete or up-to-date and they should not be relied upon as such. All information included in this report constitute AmInvestment’s views as of this date and are subject to change without notice. Notwithstanding that, AmInvestment has no obligation to update its opinion or information in this report. Facts and views presented in this report may not reflect the views of or information known to other business units of AmInvestment’s affiliates and/or related corporations (collectively, “AmBank Group”).

This report is prepared for the clients of AmBank Group and it cannot be altered, copied, reproduced, distributed or republished for any purpose without AmInvestment’s prior written consent. AmInvestment, AmBank Group and its respective directors, officers, employees and agents (“Relevant Person”) accept no liability whatsoever for any direct, indirect or consequential losses, loss of profits and/or damages arising from the use or reliance of this report and/or further communications given in relation to this report. Any such responsibility is hereby expressly disclaimed.

AmInvestment is not acting as your advisor and does not owe you any fiduciary duties in connection with this report. The Relevant Person may provide services to any company and affiliates of such companies in or related to the securities or products and/or may trade or otherwise effect transactions for their own account or the accounts of their customers which may give rise to real or potential conflicts of interest.

This report is not directed to or intended for distribution or publication outside Malaysia. If you are outside Malaysia, you should have regard to the laws of the jurisdiction in which you are located.

If any provision of this disclosure and disclaimer is held to be invalid in whole or in part, such provision will be deemed not to form part of this disclosure and disclaimer. The validity and enforceability of the remainder of this disclosure and disclaimer will not be affected.

Figure

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References

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