KUALA LUMPUR: MIDF Research has upgraded the banking sector to positive from neutral as it expects them to benefit from the economic recovery next year despite short-term headwinds such as asset quality.
In its research note on Wednesday, its top picks are banks with high loan loss coverage ratio and stable asset quality. They are Public Bank (Buy, TP: RM20.50) and Hong Leong Bank (Buy, TP: RM19.70).
MIDF Research said it had seen some resilience in the sector with the strong non-interest income generated allowing for banks to build- up their loan loss reserves.
It also noted the gross impaired loans (GIL) ratio did not spike dramatically in the first month of the post loan moratorium period.
To recap, banking system loans growth as at October was steady at +4.3% year-on-year as compared to +4.4% in September.
The research house believed loans growth continued to be driven by the PENJANA stimulus.
Loans for purchase of residential properties and auto loans continued to trend higher at +7.3% (vs. September: +7.5%) and +4.3% (September: +4.2%).
Unsurprisingly, retail loans remained stable supported by the PENJANA stimulus as they expanded +6.0% On-year to RM944.7bil vs +6.1% On-year to RM941.1bil.
However, business loans growth was slower +2.4% to RM799.4bil vs. September’s +2.6% to RM799.9bil.
The drag for business loans came from slower growth for working capital loans (+2.2% to RM403.5bil vs. +2.5% to RM403.8bil as at September.
“We opine that this could be due to prevailing cautious sentiment in businesses and the fact that we are going through the Conditional Movement Control Order (CMCO).
As for loans applied, they contracted by -6.1% due to decrease in application for working capital and construction loans which fell -12.1% to RM16.1bil and -13.3% to RM3.1b.
Nevertheless, loans application related to PENJANA stimulus continued to grow with +17.4% to RM7.22b for auto loans and +19.5% to RM29.1b for purchase of residential properties loans.
“We believe that banks continued to be cautious. However, the last two months of growth in loans approval showed that this cautiousness may have loosen slightly, ” it said.
“Loan approval grew +3.7% and +0.8% in September and October respectively. Loans approvals for auto loans grew +34.0% to RM4.9bil and for mortgage expanded +5.8% to RM10.9bil. As a result, the loans approval rate jumped to 44.6% in the month, ” it said.
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