KUALA LUMPUR: CGS-CIMB Research has reiterated "overweight" call on Malaysia's banking sector, underpinned by the expected decline in loan loss provisioning (LLP) and turnaround in net interest income growth in 2021.

The research house said the industry's loan growth picked up from 3.4 per cent year-on-year (yoy) at end-December 2020 (Dec-2020) to 3.8 per cent yoy at end-January 2021 (Jan-2021), the improvement primarily came from the business loan segment, which expanded by 1.5 per cent yoy.

"The growth in household loans inched down from 5.0 per cent yoy at end-Dec-2020 to 4.9 per cent yoy in January this year.

"However, we lower our projected loan growth for 2021 from 4.0 to 5.0 per cent previously to 2.0 to 3.0 per cent, in line with our downward revision of gross domestic product growth from 7.5 per cent previously to 5.0 per cent on Feb 9, 2021," it said in a research note on Wednesday.

CGS-CIMB feels that the Movement Control Order (MCO) 2.0 would have an indirect negative impact on banks' loan growth as it has disrupted some business activities and dampened business sentiment.

In addition, it said auto sales have also weakened in January this year, which would be detrimental for auto loan growth.

On another note, it said the trends in the leading loan indicators also weakened as the growth in loan applications moderated from 12.3 per cent yoy in Dec-2020 to 9.7 per cent yoy in January, while the contraction in loan approvals widened from 0.1 per cent yoy to 3.5 per cent yoy in the period under review.

"This does not bode well for banks' loan growth in the next one to two months," CGS-CIMB said.

The sector also saw the industry's gross impaired loan (GIL) ratio rose in Jan-2021, but the quantum of increase was manageable at only four basis points month-on-month from 1.56 per cent at end-Dec 2020 to 1.6 per cent at end-Jan 2021).

This was in line with our expectation of an uptrend in the GIL ratio. We estimate a GIL ratio of 2.0 at end-Dec 2021, it said.

"We reiterate sector 'overweight' as we expect banks' net profit in 2021 to be catalysed by a recovery in net interest income growth and a decline in LLP, which are the potential re-rating catalysts for the sector.

"Despite the cut in loan growth, we expected banks' net interest income to increase in 2021 due to wider net interest margin.

"Our top picks for the sector are Public Bank, Hong Leong Bank and RHB Bank," it added.