KUALA LUMPUR: Early signs of the banking statistics suggest that pre-emptive loan provisioning may accelerate in the second quarter (Q2) of 2020, said Kenanga Research.
The firm said month-on-month loan growth in May remained muted and year-on-year (y-o-y) growth was marginally lower at 3.9 per cent (April: 4.0 per cent).
The pace of lending to households continued to moderate, at 3.2 per cent y-o-y in May versus April's 3.3 per cent y-o-y, driven by residential mortgages and personal loans.
Similarly, loans to businesses also moderated in May, to 4.9 per cent y-o-y versus April's 5.1 per cent.
"Not surprisingly, lending to construction and real estate remained soft. Households loan repayments and disbursements continued to be impacted by the loan moratorium with repayment and disbursement levels circa 43 per cent lower from a year ago.
"However, we note a pick-up in households loan disbursements in May (44 per cent month-on-month) thanks to disbursements for auto and residential mortgages," Kenanga Research said.
In terms of loan leading indicators, overall system loan applications and approvals were flat month-on-month, which the firm said was somewhat disappointing as it had hoped to see a rebound as businesses reopened and individuals returned to work.
Kenanga Research maintained its "neutral" call on the banking sector.
"In our view, banks earnings ahead remain uncertain and volatile while the path to recovery is unlikely to be clear cut.
"In mitigation, the reopening of the economy and significant cuts to policy rate have helped clear some overhang for the sector. Also, Day One Modification losses may not be as bad as feared," it said.
Kenanga Research's top pick is RHB Bank Bhd on attractive valuations and solid capital ratios to absorb higher loan allowances while maintaining a decent dividend payout.
"In addition, it is less impacted by Day One modification losses," it said.
The firm 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.
Meanwhile, Kenanga Research said AMMB Holdings Bhd (Ambank) had booked in aggressive pre-emptive loan provisioning during its Q4 results, which could help keep further allowances ahead in check while management's recent guidance on Day One Modification losses seem much lower than initial estimates.
"AmBank's valuations appear undemanding and we think the stock could be an attractive catch-up play," it said.