Investment Highlights

• Industry loan growth moderated to 3.7% YoY in Oct 2019 (Sept 19: 3.8% YoY) due to slower non-household loans while growth in household loan was stable. Non-household loan growth slipped to 2.4% YoY (Sept 2019: 2.7% YoY) while the household loan growth was stable at 4.7% YoY. On A YTD annualised basis, total industry growth was 3.2%, similar to the first 9 months of 2019.

• Loan applications improve while approvals were still soft in Oct 2019. The non-household loan applications were stronger while those households were still slow. Meanwhile, approvals remained soft for both household and non-household loans.

• Overall deposit growth continues to slow down with a slower pace of deposits from individuals and business enterprises. Industry deposit growth slipped further to 3.5% YoY in Oct 2019 vs. 4.2%YoY in Sept and 4.6% YoY in Aug 2019. Growth of deposits from both individuals and business enterprises slid to 5.4% YoY and -1.4% YoY from 5.6% YoY and -0.6% YoY respectively. Corresponding to the slower loan growth, LD ratio for the sector fell to 88.3% in Oct 2019 vs. 88.5% in Sept. Industry CASA slowed down to a growth rate of 5.5% YoY in Oct 2019 vs. 6.5% YoY in Sept resulting in a lower CASA ratio of 25.8%.
   
• Stable weighted average lending rate and base rate. The sector's weighted base rate and average lending rate were unchanged at 3.68% and 4.76% respectively. Also, BLR remained at 6.71%. The average deposit rate (the average rates for FDs of up to 1-year tenure) was 2bps higher MoM to 2.97%, underpinned by the increase in the 3-month FD rate. Interest spread (difference between weighted average lending rate and average FD rate) declined to 2.20% in Oct 2019 vs. 2.23% in the preceding month as the average deposit rate was slightly higher in the month.
   
• Continuing trend of gradual decline in upticks of impaired loans. The industry’s outstanding impaired loans in Oct 2019 increased by 0.5% MoM or RM127.1mil and this was lower than the upticks observed for July, Aug and Sept 2019. By loan purpose, the upticks in Oct 2019 were largely driven by a higher impairment of loans for purchase of residential property and working capital loans. Oct 2019 saw the rise in impairments of manufacturing, construction and household sector loans.

• Lower CET1 and Tier 1 ratios by 10bps MoM. The sector's CET1 and Tier 1 capital ratios remained healthy despite easing 10bps MoM to 13.7% and 14.4% respectively while the total capital ratio was sustained at 17.7%.

• 10-year MGS yield rose by 9.4bps MoM. Market indicative yield for 10-year MGS climbed 9.4bps MoM to 3.44%. 3Q19 witnessed banks disposing of bonds to realise gains benefitting from the yields which remained low.

• Lower new issuance of bonds/sukuks in Oct 2019 despite declining redemptions. YTD net funds raised in the market by the private sector were RM47.5bil, registering a decline of 2.6% YoY. Oct 2019 saw lower new issuance for bonds/sukuks despite redemptions declining. Meanwhile, equity capital market activities continued to be soft.

• Maintain OVERWEIGHT on the sector as valuation and dividend yields of banks remain compelling. Our top picks are Hong Leong Bank (FV: 18.90/share), Maybank (FV: RM9.80/share) and RHB Bank (FV: RM6.50/share).

Source: AmInvest Research - 3 Dec 2019