Investment Highlights

• Industry loan growth accelerated to 6.2%YoY in Nov 2018 (Oct 2018: 6.0%YoY) supported by a stronger momentum in nonhousehold loans while household loan growth moderated slightly. Year-to-date (YTD) industry loan growth was 5.5% annualised vs. our expectation of 5.0% for 2018. Non-household loan growth improved to 6.8%YoY in Nov 2018 contributed by stronger growth of loans to the manufacturing, wholesale, retail, restaurants and hotels and construction sectors. We believed that the improvement in loan growth to the manufacturing sector was due the strong export growth. Nevertheless, this is expected to moderate ahead due to the slowdown in global trade activity as a result of the US-China trade spat. We project a loan growth of 4.0–5.0% for the sector in 2019.

• Likely moderation in loan growth ahead from slower pace of loan applications. Loan applications moderated, largely due to the slowdown in applications from the wholesale & retail trade, restaurants and hotel, finance, insurance and business activities segments as well as the household sector.

• Slowdown in loan approvals. Nov 2018 evidenced a slower growth in approvals for household and non-household loans.

• Industry deposit growth rose while CASA ratio remained stable. Industry deposit growth rose to 7.5%YoY in Nov 2018. Business deposit grew 4.6%YoY while that of individual deposits expanded by 5.2%YoY. Industry LD ratio in Nov 2018 stood at 87.6%. The sector’s liquidity eased slightly with lower loan-to-fund ratio and loan-to-fund and equity ratios of 82.9% and 72.5% respectively (Oct 2018: 83.3% and 72.7%). Industry CASA growth improved to 3.2%YoY (Oct 2018: 2.5%YoY). CASA ratio for the sector remained stable at 25.7%.

• No changes to the weighted average lending rate (ALR) and base rate. The sector's weighted ALR and base rate stayed at 5.42% and 3.90% respectively. Nov 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 2.27%.

• Stable asset quality. Impaired loans declined by 1.5%MoM and the industry GIL ratio was stable at 1.5%. Industry’s NIL ratio continued to hold up at 0.93% while loan loss cover strengthened to 97.5% following a decline in impaired loans.

• Capital ratios remained healthy. The sector's CET1, Tier 1 and total capital ratios were 13.0%, 13.7% and 17.2% respectively.

• MGS yields rose marginally despite pressure from foreign fund outflows with support from domestic institutional investors while net issuance of new bonds and sukuks by the private sector slowed down. Cumulative net funds raised in the market by the private sector for the first 11 months of 2018 was RM51.9bil (-30.6%YoY). This was due to the lower net issuance of new bonds/sukuks while capital market activities for equities remained slow. The US recently hiked its rates in Dec 2018 by another 25bps to 2.25–2.50%. Two more increases in the US Fed rate in 2019 is expected, causing markets to remain volatile. However, this will be lesser in terms of number of hikes compared to 2018, moving closer to the end of the rate hike cycle.

• Maintain OVERWEIGHT on the sector. Our top picks are RHB Bank (FV: RM6.20/share), Public Bank (FV: RM26.00/share) and Maybank (FV: RM10.70/share).

Source: AmInvest Research - 2 Jan 2019