Investment Highlights

• Slower industry loan growth of 3.9% YoY in July 2019 (June: 4.2% YoY) due to moderation in household loan and nonhousehold loans. The industry loan growth slipped to 3.9% YoY with loan repayments outpacing disbursements. Non-household loan growth declined to 2.9% YoY in July 2019 vs. 3.3% YoY in June while the household loan growth decelerated further to 4.7% YoY (June 2019: 4.9%YoY). On YTD annualised basis, total industry growth was slower at 2.4% vs. 2.6% annualised for the first 6 months of 2019. We are maintaining our loan growth assumption for the sector of 4.0–5.0% in 2019.

• Loan applications and approvals picked up pace in July 2019 after a slowdown in June. Both household and non-household loan applications and approvals improved in July 2019.

• Overall deposit growth decelerated but CASA ratio remained stable. Industry deposit growth slowed down to 4.9% YoY from 5.1% YoY in June, and it continued to outpace loans. Deposits from business enterprises were slightly softer at 0.3% YoY (June 2019: 0.5% YoY) while individual deposit growth improved marginally to 5.8% YoY (June: 5.7%YoY). LD ratio for the sector in July 2019 was 87.9% (June: 88.2%). Correspondingly, the sector’s loan-to-fund ratio and loan-to-fund and equity ratios improved slightly to 82.3% and 71.7% respectively (June 19: 82.6% and 72.2%). Liquidity for the sector remained ample.

• Average lending rate continued to slip but no change in weighted base rate. The sector's weighted base rate remained at 3.68%. However, the weighted average lending rate fell to 5.20% in July 2019 vs. 5.23% in June 2019. No change to BLR at 6.71%. The average deposit rate (the average rates for FDs of up to 1-year tenure) continued to hold up at 2.97%. Interest spread (the difference between weighted average lending rate and average FD rate) was lower at 2.23% compared to 2.27% in June 2019. We continue to expect another OPR cut of 25bps in 2H19 and have imputed this into our banks earnings’ estimates.

• Uptick in loan impairments but GIL ratio remained at 1.6%. The industry’s outstanding impaired loans in July 2019 increased by 1.7% MoM or RM472.3mil. By loan purpose, the uptick in impairments was broad-based except loans for purchase of non-residential property. In terms of sectors, the upticks MoM were mainly contributed by higher impairment of loans to the manufacturing, construction and household sectors.

• Stronger CET1, Tier 1 and total capital ratios. The sector's CET1, Tier 1 and total capital ratio rose to 13.9%, 14.6% and 17.9% respectively.

• 10-year MGS yield continued to slide. Market indicative for 10-year MGS declined by 5bps MoM to 3.59%.

• Issuance of bonds/sukuks continued to be more active than the equity capital market in July 2019. YTD net funds raised in the market by the private sector were higher at RM47.6bil, registering an increase of 42.7% YoY. YTD net issuance of corporate bonds/sukuks rose 21.7%YoY to RM42.5mil although the numbers were softer in June and July 19.

• Maintain OVERWEIGHT on the sector as valuation and dividend yields of banks remain compelling. Our top picks continue to be Maybank (FV: RM9.80/share) and RHB Bank (FV: RM6.50/share). During the recent reporting season, we have upgraded Hong Leong Bank to a BUY (FV: RM18.90/share) while downgraded Alliance Bank to a HOLD from BUY (FV: RM3.40/share).

Source: AmInvest Research - 3 Sept 2019