Investment Highlights

• Stable industry loan growth of 3.9% YoY in Aug 2019 (July: 3.9% YoY) with momentum for household loan and non-household loans holding up. The industry loan growth was unchanged at 3.9% YoY in Aug 2019. Non-household loan growth was stable at 2.9% YoY while the household loan growth was 4.6% YoY (July: 4.7% YoY). On a YTD annualised basis, total industry growth improved to 2.9% vs. 2.4% annualised for the first 7 months of 2019. We keep our loan growth assumption for the sector at 4.0–5.0% in 2019 as well as our expectation of another OPR cut of 25bps in 2H19 which will be supportive of economic growth. Meanwhile, should Budget 2020 turn out to be mildly expansionary in line with market expectations, this will be positive on loan growth as well as mitigating the downside risk on the sector’s asset quality.

• Slower loan applications and approvals in Aug 2019. Both household and non-household loan applications and approvals slowed down in Aug 2019 after a pickup in July 2019.

• Overall deposit growth continued to slow down largely due to a slower pace of deposits from business enterprises. Industry deposit growth slowed down further to 4.6% YoY from 4.9% YoY in the previous month. Deposits continued to outpace loan expansions. Growth of deposits from individuals was stable. LD ratio for the sector was 87.9%. Industry CASA expanded by 5.2% YoY, marginally lower than the 5.3% YoY registered in the previous month. CASA ratio remained stable at 25.7%.

• Stable weighted average lending rate and base rate. The sector's weighted base rate remained at 3.68% while weighted average lending rate was 5.19%, inching lower from 5.20% in July 2019. No change to BLR at 6.71%. The average deposit rate (the average rates for FDs of up to 1-year tenure) was steady at 2.96%. Interest spread (difference between weighted average lending rate and average FD rate) was sustained at 2.23% in Aug 2019.

• Further upticks in loan impairments but GIL ratio continued to be stable at 1.6%. The industry’s outstanding impaired loans in Aug 2019 increased by 1.2% MoM or RM336.9mil, lower than July 2019’s rise of 1.7% MoM or +RM472.3mil. By loan purpose, the upticks were largely driven by higher impairment of loans for purchase of residential property, personal financing and loans for construction and working capital. Aug 2019 also saw a continued rise in impairments of manufacturing, construction and household sector loans.

• CET1, Tier 1 and total capital ratios all eased by 20bps. The sector's CET1, Tier 1 and total capital ratio declined slightly to 13.7%, 14.4% and 17.7% respectively.

• 10-year MGS yield slipped by 28.5bps MoM. The market indicative yield for 10-year MGS declined by 28.5bps MoM to 3.30% due to improved demand for government bonds following a global bond rally.

• Higher bonds/sukuks redemptions in Aug 2019. YTD net funds raised in the market by the private sector were RM43.1bil, an increase of 8.6% YoY. Aug 2019 saw higher redemptions for bonds/sukuks. Excluding redemptions, new issuance of corporate bond/sukuks grew 30.3% YTD to RM88.8bil.

• 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).

Source: AmInvest Research - 1 Oct 2019