Investment Highlights

• Industry loan growth accelerated to 5.4%YoY in Aug 2018 (July 2018: 5.3%YoY) supported by a stronger traction in household and nonhousehold loans. Year-to-date (YTD) industry loan growth of 5.4% remained close to our expectation of 5.0% for 2018.

• Loan applications in Aug 2018 picked up pace with stronger non-household loan demand. While non-household loan applications rose, applications for household loans were lower. This was contributed by the slower growth in loan applications for purchase of cars. We believe that this could be due to the tail end of the tax holiday just before the implementation of the SST where most buyers who intend to purchase cars had already applied for loans earlier.

• Slower loan approvals. While approvals of working capital loans picked up pace, approvals for most of household segments’ loans were slower in Aug 2018.

• Industry deposit growth remained stable but growth in CASA continues to slow down. Industry deposit growth remained steady at 5.8%YoY while CASA growth descend further to 3.4%YoY (July 2018: 3.8%YoY and June 18: 5.3%YoY). The sector’s CASA ratio slipped to 26.2% from 26.4% in the preceding month. Industry LD ratio in Aug 2018 was steady at 89.3%. The sector’s liquidity continued to be healthy based on a loan-to-fund ratio and loan-to-fund and equity ratios of 83.7% and 73.0% respectively (July 2018: 83.4% and 72.7%).

• No changes to the weighted average lending rate (ALR) and base rate. The sector's weighted ALR and base rate stayed at 5.44% and 3.90% respectively. Aug 2018 saw the average deposit rate (the average rates for FDs of up to 1-year tenure) holding up at 3.21%. Interest spread (using the difference of the weighted average lending rate and 3-month FD rate as proxy) remained stable at 2.28%.

• Impaired loans in Aug 2018 rose marginally by 0.7%MoM but the industry GIL ratio remained stable at 1.6%. Industry’s NIL ratio continued to be steady at 0.99%. The sector’s loan loss cover slipped to 93.5% from 96.2% in the preceding month attributed to the upticks in impaired loans.

• Lower capital ratios due to dividend payments and phasing out of Basel II capital instruments by banks. The sector's CET1, Tier 1 and total capital ratios for the banking sector were 13.2%, 13.9% and 17.4% respectively.

• MGS yields tapered further with the support from domestic institutional investors while net issuance of new bonds and sukuks continued to pick up momentum in Aug 2018 after rising in the preceding month. Cumulative net funds raised in the market by the private sector for the first eight months of 2018 was RM39.7bil. This was still a drop of 18.3%YoY but the decline has narrowed after the pickup in issuance of bonds/sukuks in July and Aug 2018. Year-to-date net issuance of new bonds/sukuk rose marginally by 0.7%YoY to RM38.6bil while capital market activities for equities remained soft. The US Fed recently hiked rates in Sept 2018 by another 25bps to 2.00–2.25%. Further increase in the US Fed rate ahead is expected, causing markets to remain volatile. However, this is expected to taper as we move closer to the end of the US rate hike cycle.

• Maintain OVERWEIGHT on the sector. Our BUY calls are RHB Bank (FV: RM6.10/share), Public Bank (FV: RM26.00/share), Alliance Bank (FV: RM5.00/share), BIMB Holdings (FV: RM5.40/share), Maybank (FV: RM10.70/share) and MBSB (FV: RM1.27/share).

Source: AmInvest Research - 1 Oct 2018