Investment Highlights

• Industry loan growth moderated to 3.8% YoY in Sep 2019 (Aug 19: 3.9% YoY) with slower disbursements. The industry loan growth eased slightly to 3.8% YoY in Sep underpinned by slower pace of non-household loans with a growth of 2.7% YoY while the household loan growth was stable at 4.6% YoY. On YTD annualised basis, total industry growth improved to 3.2% vs. 2.9% annualised for the first 8 months of 2019. Meanwhile, the 2020 budget has been mild expansionary, and this should lend support to the economic growth.

• Loan applications and approvals remain slow in Sep 19. This has been contributed largely by the slower momentum of non-household loan applications and approvals.

• Overall deposit growth continued to slow down largely due to slower pace of deposits from business enterprises. Industry deposit growth slowed down further to 4.2% YoY from 4.6% YoY in the previous month. Deposits continued to outpace loan expansions. LD ratio for the sector climbed to 88.5%. Industry CASA expanded at faster rate of 6.5% YoY, higher than the 5.2% YoY registered in the previous month. CASA ratio lifted higher to 26.0%.

• Stable weighted average lending rate and base rate. The sector's weighted base rate remained at 3.68% while weighted average lending rate was steady at 5.18%. No change in BLR at 6.71%. Interest spread (difference between weighted average lending rate and average FD rate) continued to hold up at 2.23% in Sep 2019. The US Fed Reserve has just announced a third rate cut of 25bps to 1.50–1.75% with a tone signalling a pause in rate cuts. We view this as positive in putting less pressure on the central banks in the Asean region to further cut their interest rates. We are now expecting the OPR to remain at 3.00% for the upcoming MPC meeting on 5 Nov compared to a view of a further 25bp reduction in interest rates. With that, NIM of banks are expected to improve, normalizing from the first OPR reduction in May 2019.

• Smaller upticks in loan impairments while provisions declined in Sep 19. The industry’s uptick in impaired loans in Sep 19 was smaller at 0.9% MoM or RM244.4mil, lower than the increase in Aug 2019. By sector, Sep 19 saw the rise in impairments of loans to the wholesale & retail trade, and restaurants & hotels, finance, insurance and business activities and household segments. Meanwhile, the amount of impaired manufacturing and construction loans, which rose in Aug 2019, have declined in September. The industry’s total GIL remained stable at 1.6% while NIL ratio stayed at 1.05%. On a comforting note, total provisions for the sector showed a decline by 0.8% MoM or RM207.8mil in Sep 2019. Provisions have not further deteriorated after seeing 2 consecutive months of increase for the sector in July and Aug 2019.

• Stable CET1 but both Tier 1 and total capital ratios eased 10bps MoM. The sector's CET1 was sustained at 13.8%. However, both Tier 1 and total capital ratios eased 10bps MoM to 14.4% and 17.7% respectively.

• Higher new issuance of bonds/sukuks by private sector but these were partially offset by an increase in redemptions in Sep 19. YTD net funds raised in the market by the private sector were RM45.6bil, registering a rise of 7.5% YoY. New issuance of corporate bond/sukuks increased 223% MoM but was partially offset by higher redemptions in Sep 2019.

• Maintain OVERWEIGHT on the sector with valuation and dividend yields of banks continue to look appealing. Our top picks remain Maybank (FV: RM9.80/share) and RHB Bank (FV: RM6.50/share).

Source: AmInvest Research - 1 Nov 2019