Loan growth ahead of our expectation

■ The industry’s loan growth improved from 3.3% yoy at end-Oct 21 to 4.3% yoy at end-Nov 21, above our projected growth of 2.5-3.5% for 2021F.
■ We think banks’ LLP declined further qoq in 4Q21, judging from the RM143.3m drop in the banking industry’s total provision in Oct-Nov 21.
■ We reiterate our Overweight call on banks as we expect earnings to continue to recover; we project core net profit growth of 2.3% for Malaysian banks

Continuous recovery in loan growth

We are positive on the continuous improvement in banks’ loan growth from 3.3% yoy at end-Oct 21 to 4.3% yoy at end-Nov 21. The momentum for both major loan segments also accelerated – from 3.7% yoy at end-Oct 21 to 4.1% yoy at end-Nov 21 for household loans and from 3.1% yoy at end-Oct 21 to 4.8% yoy at end-Nov 21 for business loans. We believe this was partly due to pent-up loan demand during the lockdown period in 2Q-3Q21.

Loan growth ahead of our expectation

The banking industry’s total loans expanded by 4% in 11M21, above our projected growth of 2.5-3.5% for 2021F, due to stronger-than-expected recovery in business loan growth. We are positive on the above as this will boost banks’ net interest income and net profit. We estimate that every 1% pt increase in our projected loan growth lifts our CY21F net profit forecast for banks by circa 0.8%. Continuous improvement in loan growth in the recent months show s that momentum is returning to the normalised level of 4-5%, which is our loan growth forecast for CY22F.

Rejuvenation in credit demand reflected by robust loan applications

Another positive development for banks in Nov 21 w as the strong recovery in the growth of the banking industry’s loan applications from 4.2% yoy in Oct 21 to 21.5% yoy in Nov 21, reflecting the improvement in credit demand amidst the reopening of the economy. This bodes well for loan growth in the coming months. Applications for residential mortgages, auto loans and working capital loans even rose by 20-40% yoy in Nov 21.

A further decline in 4Q21F loan loss provisioning?

Total provision for the banking industry declined by RM143.3m or 0.4% in the two-month period from end-Sep 21 to end-Nov 21 as a result of the RM1.46bn or 5% drop in gross impaired loan over the same period. Based on the above, w e think that banks’ loan loss provisioning (LLP) declined further qoq in the 4Q21, barring any spike in total provision in Dec 21. This will be positive for the banking sector’s 4Q21 net profit growth (w e expect this to be more than 20% yoy).

Reiterate Overweight on banks

The positive takes from the Nov 21 banking statistics were the further improvements in loan growth and gross impaired loan ratio (from 1.52% at end-Oct 21 to 1.47% at end-Nov 21). We continue to rate Malaysian banks as Overweight as w e believe they will benefit from the economic recovery and our assumed 25bp hike in overnight policy rate (OPR) in mid2022F. The potential re-rating catalysts is continued earnings recovery; our projected core net profit (CNP) growth for CY22F is 2.3%. Our picks for the sector are HLB, PBB and RHBB.