KUALA LUMPUR – MIDF Amanah Investment Bank Bhd (MIDF IB) is expecting a 5% year-on-year (y-o-y) loan growth this year for the banking sector, driven by accelerated loan demand.
The investment bank said in a note today that the banking system’s loans as at January 2021 grew at a slightly faster rate of 3.8% year-on-year (y-o-y) compared with 3.4% y-o-y in December 2020.
It added that the main contributor was the pace of growth for the top three loans segment – namely mortgage, automotive, and working capital loans, which grew by 5.4% y-o-y to RM1.22 trillion.
“Loan demand was robust with total loan applications growing by 9.7% y-o-y versus 12.3% y-o-y in December 2020.
“This was due to higher application for housing loans which rose 61.7% y-o-y to RM25.9 billion, while applications for automotive loans grew 8.1% y-o-y to RM6.6 billion,” it said.
MIDF IB said retail loans growth continued to be consistent, growing by 5.7% y-o-y to RM956.6 billion in January 2020, from RM953.7 billion in December 2020.
“We expect retail loans to continue providing support to the overall loans growth this year, especially with the various incentives for car and property purchase,” it said.
On business loans, MIDF IB said the segment expanded to RM799.5 billion in January 2021 versus RM795.7 billion in December last year, driven by the faster growth pace of working capital loans.
“We expect business loans to grow at a faster pace than last year and boost the overall loans growth, premised upon a recovery in the economy,” said the research house.
However, it noted that banks remained cautious, as shown by the loan approval rate which contracted 3.5% y-o-y, attributing it to the 26.8% y-o-y contraction in the approved working capital loans which fell to RM5.2 billion.
Meanwhile, approved loans related to the retail segment, namely for the purchase of passenger cars and residential properties, grew 3.5% y-o-y to RM4 billion and 25.9% y-o-y to RM8.9 billion, respectively.
Conversely, the business segment may face some short-term weakness following the implementation of the movement control order, it said.
“Overall, we expect loan demand to accelerate this year, leading to higher loan growth, especially in the second half of this year (2H21).
“Besides consumer loans, we expect businesses to drive loans growth in 2021 to fund the expected increase in business activities,” it said.
With this, MIDF IB expects a 5% y-o-y loan growth for this year, compared to the loan growth average of 4.01% last year.
On another note, it said the strong Current Account and Savings Account (CASA) growth remains unabated for now, continuing to be the main driver by maintaining its strong expansion since the loan moratorium was announced.
CASA accelerated to 24.1% y-o-y in January 2021, from the 19.3% y-o-y registered in the preceding month, while fixed deposits contracted for the eleventh consecutive month at 4.6% y-o-y to RM957.8 billion, it said.
“We opine that depositors may be reluctant to tie-up their cash flows and desire to maintain liquidity, given the uncertain conditions as a result of Covid-19.
“We expect this to moderate the net interest margin (NIM) compression for banks in 2021,” it said.
Meanwhile, MIDF IB also noted a continued uptick in the gross impaired loans (GIL) ratio, following the end of the loan moratorium.
It also expected some fragility in asset quality, but said that this would be moderated by the targeted loan moratorium and repayment assistance.
Hence, the research house has forecast a GIL ratio of circa 1.7% this year.
Moving forward, MIDF IB said it is sanguine on the banking sector’s prospects this year, made more certain with the rollout of vaccines which would be widely available in 2H21.
It expects banks’ credit costs to start normalising, while income will stage a rebound on faster loans growth and benign NIM compression, thus improving earnings this year.
“We maintain a positive recommendation for the sector amidst the short-term pressure that banks will have to overcome.
“Primarily, the potential stress is on asset quality, but we opine that banks, in general, will be able to weather it, especially banks with large loan loss reserve and/or has been resilient during the current challenging environment,” the investment bank said.
MIDF IB’s top picks for the sector are Hong Leong Bank (buy, target price (TP): RM19.70) and RHB Bank (buy TP: RM5.90). – Bernama, March 2, 2021
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