Investment Highlights

• Industry loan growth moderated to 5.6%YoY in De 2018 (Nov 2018: 6.2%YoY) as growth in non-household loans eased while household loan growth moderated slightly. The industry ended 2018 with a loan growth of 5.6%YoY which was close to our expectation of a 5.0% growth. Non-household loan growth slipped to 5.7%YoY in Dec 2018 (Nov 2018: 6.8%YoY) contributed by a slowdown in working capital financing and loans for construction purposes. Moving forward, we expect the country’s export numbers to be softer, and we project a loan growth of 4.0-5.0% for the sector in 2019. We expect both the non-household and household loans in 2019 to moderate from 2018.

• Pick up in non-household loan applications. Dec 2018 saw an improvement in growth of industry loan applications to 4.8%YoY vs. - 24.3%YoY in the preceding month. This was attributed to the improvement in pace of both household and non-household loan applications.

• Slower loan approvals. Industry loan approvals continued to slide and registered a slower growth of -10.1%YoY compared to - 6.7%YoY and 15.0%YoY in Nov and Oct 2018 respectively. Growth in approvals of non-household loans declined but that of household loans was better.

• Industry deposit growth continued to gain traction while CASA ratio has been holding up. Industry deposit growth further accelerated to 8.6%YoY from 7.5%YoY in Nov 2018. Business and individual deposits expanded at a faster growth rate of 6.7%YoY and 5.2%YoY respectively. Industry LD ratio in Dec 18 eased marginally to 87.3%. The sector’s liquidity remained steady with a loan-to-fund ratio and loan-to-fund and equity ratios of 82.7% and 72.4% respectively (Nov 2018: 82.9% and 72.5%). Industry CASA growth slipped to 1.2%YoY (Nov 2018: 3.2%YoY). Nevertheless, the sector’s CASA ratio was still stable at 25.9%.

• No change to the weighted average lending rate (ALR) but base rate inched up slightly. The sector's weighted ALR stayed at 5.42% while base rate rose slightly to 3.91%. Dec 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 1.8%MoM and the industry GIL ratio was stable at 1.5%. Industry’s NIL ratio continued to be holding up at 0.91% while loan loss cover was intact at 97.8%.

• Capital ratios enhanced and remained healthy. The sector's CET1, Tier 1 and total capital ratios was 13.1%, 13.9% and 17.4% respectively.

• MGS yields rose marginally despite pressure from foreign fund outflows with support from domestic institutional investors and 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 2018 was RM49.1bil (-41.8%YoY) vs. RM84.3bil in 2017. Issuance of corporate sukuk/bonds contracted by 31.6%YoY to RM46.7bil. Meanwhile, activities for equity capital market continued to be subdued.

• 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 - 4 Feb 2019