Apr 18 loans growth came in at 4.8% and continues to lag our full-year growth target of 5.0-5.5% as working capital loans growth which was expected to recover remains lacklustre. On a brighter note, asset quality and deposit growth remained stable. Maintain MARKET WEIGHT on banks as loan growth is expected to remain modest while earnings growth is moderating. CIMB is our top sector with the stock trading at -1SD on both P/B and PE valuation metrics.

WHAT’S NEW

• Apr 18 loans growth improved marginally. Apr 18 loans growth came in at 4.8%, a marginal improvement from Mar 18’s 4.4% but continues to lag our full-year growth target of 5.0-5.5% as working capital loans growth which was expected to recover remained lacklustre at 1.4% yoy. Overall Apr 18 loans growth was underpinned by residential property (+8.9% yoy) and construction-related loans (+10.5% yoy). Apart from working capital, other key loan segments that remained weak are: auto (-1.0% yoy) and non-residential property (+2.0% yoy). It is too early to gauge the impact of loans growth impact post-GE14 as potentially stronger auto and consumer durable loans growth from the new government’s mandate to raise disposable income will be partially offset by slower construction and government-related corporate loans growth.
• Deposit growth steady but CASA growth has moderated from recent peak. Overall deposits growth was relatively promising, expanding 5.6% yoy in Apr 18 (Mar 18: 5.2%) However, we note that fixed deposit growth continued to gain traction, coming in at 5.1% yoy in Apr 18 vs 2017’s 2.2% yoy, while CASA growth has tapered off to 6.0% yoy vs 2017’s 9.7%. This is generally in line our expectations that a rising rate environment coupled with a pick-up in loans growth would prompt banks to compete more aggressively for fixed deposits and thereby offset some of the positive re-pricing gap from the recent interest rate hike.
• GIL remains manageable. Gross impaired loans (GIL) were relatively flat yoy and with GIL ratio inching up by 1bp mom to 1.58%. Non-residential property loans was the only key segment that saw a large deterioration in asset quality with its GIL rising 16.2% yoy.
• Maintain MARKET WEIGHT. Post-GE14 macro policy uncertainty has negatively impacted sentiment on the sector as this could place some downside risk on GDP growth which would in turn impact overall sector growth as banks are ultimately deemed a proxy to overall economic growth. Overall sector valuations have declined by 7% post-GE14 to 1.35x 2018F P/B which is fair against a forecasted ROE of 10.5%. As such, sector valuations have not de-rated sufficiently enough to compensate for the modest industrywide loans growth of 4.5%, gradual upward normalisation in provisions, benign interest rate outlook and hence NIMs - especially if inflation were to come in lower than expected given the new government’s mandate to lower overall cost of living. Among banks, CIMB (BUY, Target: RM7.40) remains our top pick given its valuations at -1SD on P/B and PE terms while Maybank (HOLD, Target: RM10.20) may continue to be plagued with provision risk from its exposure to Hyflux. As for both Public Bank (2.4x P/B) and Hong Leong Bank (1.6x P/B), we believe that their stable and defensive franchises have largely been reflected in their premium valuations which prompts us to maintain our HOLD recommendations for both.

Source: UOB Kay Hian Research - 1 Jun 2018