• Maintain NEUTRAL; Top Picks: Malayan Banking, Hong Leong Bank and AMMB. Most indicators are pointing towards further recovery in the economy since the Malaysian Government implemented the Recovery Movement Control Order (RMCO) on 10 Jun. System outstanding loans, applications and approvals all saw better sequential performance where households were the bright spot. Repayment has also begun picking up – in line with banks’ feedback on declining opt-out rate of the moratorium. Proactive provisions continued to rise despite asset quality showing no distress signs.
• June system loans growth picked up to +0.6% MoM (May: +0.2% MoM). The main contributors are household (+0.6% MoM) and working capital loans (+0.9% MoM). Annualised system loans growth for 6M20 stood at +3.2%, considerably higher than the annualised 5M20 growth of +2.4%.
• Stimulus-induced household loan demand. System loan applications on a 3-month moving average (3MMA) basis saw a mild +3.2% MoM rebound but June alone saw a strong 45% MoM leap. Both residential mortgages and auto loan applications saw staggering 22% and 31% MoM jump, greatly lifted by the property and auto stimulus measures announced by the Government. Non-household loan demand normalised (-4.4% MoM) from the highs in prior months, led by wholesale & retail (-6.7%), real estate (-13.5%), transport & storage (-10.4%) and agriculture (-21%).
• Approvals catching up; repayment picking up. System loans approvals on a 3MMA basis recovered 4.2% MoM – June’s approvals soared 66% MoM – mainly on higher approvals for working capital loans (+21%) and auto loans (+16%). We believe this largely reflects loan approvals catching up with the prior months’ high applications. Separately, we saw system loan repayment picking up in June (+18.7% MoM). Repayment percentage rose as outstanding loans also rebounded strongly to 5.2% in June (May: 4.4%). We believe more borrowers are opting out of the moratorium as economic activities resumed since the Malaysian Government implemented the more relaxed RMCO on 10 Jun.
• LLC climbs despite stable GILs. System GILs trended down 5.3% MoM but remained fairly stable YTD (-1.8%) due to the 6-month moratorium. We expect system GILs to remain stable in 2020, further helped by the targeted relief measures recently announced by Prime Minister Tan Sri Muhyiddin Yassin. That said, it is worth highlighting that system LLC ratio has been on a rise YTD, up from 80.9% in Dec 2019 to 92.9% in Jun 2020 (Figure 27). This trend is more apparent on a QoQ basis – system total provisions were 6% QoQ higher in 2Q20 despite GILs declining 7% during the same period. We believe banks are employing a more proactive and conservative approach in setting provisions even when asset quality is still stable.
• SME loans grew 0.8% MoM in May (Apr: +1.3% MoM). Wholesale & retail (+0.9%) and manufacturing (+1.6%) sectors registered the highest MoM growth as the need for additional working capital loans grew (+1.4% MoM). GIL ratio is 3bps higher MoM at 2.69% mainly due to a 20% MoM jump in manufacturing GIL.

Source: RHB Securities Research - 3 Aug 2020