KUALA LUMPUR: The local banking system's loan growth has picked up in June, expanding 4.1 per cent year-on-year (Y-o-Y) versus 3.9 per cent (YoY) in May.

Kenanga Research said the main highlight was the strong rebound in household loan applications of 133 per cent month-on-month (MoM) and approvals (110 per cent MoM), possibly from improved economic activities and pent-up demand.

"It will be interesting to see in the coming months if such levels of applications and approvals can be sustained," the firm said in a report today.

The banking system's asset quality appears well preserved with system gross impaired loans down five per cent MoM.

Its loss coverage rose further to 93 per cent from 89 per cent in May on a combination of improved asset quality and banks building up reserve coverage in the second quarter.

Kenanga Research said YoY, June 2020 total deposits had risen at a faster clip of five per cent compared to four per cent YoY in May.

Deposits from individuals were up seven per cent YoY while business deposits rose one per cent YoY from one per cent YoY decline in May.

CASA (current account savings account) growth remained robust at 17 per cent YoY (May: 14 per cent YoY) while fixed deposits were flat YoY (May: -1.0 per cent YoY).

Kenanga Research kepts its "neutral" call on the sector as banks earnings ahead remained uncertain and volatile while the path to recovery was unlikely to be clear cut.

"Early signs from the banking statistics suggest that pre-emptive loan provisioning may see an acceleration in the second quarter.

In mitigation, the firm said the re-opening of the economy and significant cuts to policy rate had helped clear some overhang for the sector.

Also, Day One Modification losses may not be as bad as feared.

RHB Bank Bhd is Kenanga Research's top sector pick on attractive valuations and solid capital ratios to absorb higher loan allowances while maintaining a decent dividend payout.

It also likes Hong Leong Bank Bhd as a defensive, "high quality" bank with a strong digital infrastructure that is poised to benefit from a post Covid-19 environment.

"AMMB Holdings Bhd's valuations appear undemanding and we think the stock could be an attractive catch-up play," it added.