Better-than-expected loan growth in 2021
? The industry’s loan growth of 4.5% in 2021 was higher than our projected 2.5-3.5%, due to stronger-than-expected business loan growth of 5%.
? While banks’ GIL ratio of 1.44% at end-21 was below our projected 2%, we believe there were no material write-backs of Covid-19 provisions in 4Q21.
? Reiterate sector Overweight, premised on expected continuous recovery in earnings growth with projected core net profit growth of 2.3% in CY22F.
A continuous improvement in loan growth in Dec 21
The industry’s loan growth improved for the fourth consecutive month, up from 4.3% yoy at end-Nov 21 to 4.5% yoy at end-Dec 21. Both major loan segments posted a pick-up in momentum – from 4.1% yoy at end-Nov 21 to 4.3% yoy at end-Dec 21 for household loans and from 4.8% yoy at end-Nov 21 to 5% yoy at end-Dec 21 for business loans.
Better-than-expected loan growth in 2021
The loan growth of 4.5% in 2021 (vs. 3.4% in 2020) was higher than our projected growth of between 2.5% and 3.5%. With this, the loan growth has normalised to the pre-Covid-19 level of 4-5%. The outperformance (vs. our forecast) mainly came from business loans, which expanded by 5% in 2021 vs. our forecast of 2-3%. We estimate that every 1% pt increase in loan growth would raise our projected FY21F net profit for banks by circa 0.8%. We are projecting loan growth of 4-5% for 2022F.
Lower-than-expected GIL ratio but minimal impact on earnings
The banking industry’s gross impaired loan (GIL) ratio continued to slide for the fourth consecutive month, down from 1.47% at end-Nov 21 to 1.44% at end-Dec 21, below our projected 2%. Bank’s GIL ratio was primarily contained by the repayment assistance offered by banks to their borrowers. We think that the lower-than-expected GIL ratio would have minimal impact on banks’ net profit as we do not expect this to lead to any material write-back of the preemptive provisions provided by banks previously, considering the lingering credit risks from Covid-19.
Expecting 4Q21 LLP to decline yoy and qoq
Even without any write-backs, we estimate banks’ loan loss provisioning (LLP) declined yoy and qoq in 4Q21 (unless there was a spike in LLP for overseas loans) from an all-time high of RM4.54bn in 4Q20 and RM2.56bn in 3Q21. We arrived at this conclusion after referring to RM69.5m decline in banks’ total provisions in 4Q21, compared with an increase of RM3.64bn in 4Q20 and RM1.63bn in 3Q21.
Reiterate Overweight on banks
Better-than-expected loan growth and contained GIL ratio in 2021 paint a positive picture for banks’ outlook. These support our expected continuous recovery in earnings growth, with our projected core net profit growth of 2.3% in CY22F and 17.7% in CY23F. This is the potential re-rating catalyst that underpins our Overweight call for the sector. Our picks for the sector are Hong Leong Bank, Public Bank and RHB Bank.