May 18 loans growth came in at 4.9%, continuing to lag our full-year growth target of 5.0-5.5% as working capital loans growth, which was expected to recover, remained lacklustre. On a brighter note, asset quality remains stable. Maintain MARKET WEIGHT as slight downside risk to growth is balanced out by stable asset quality and provision trends. Given the current macro uncertainty, Public Bank remains our top sector pick for its defensive qualities.

WHATS NEW

May 18 loans growth improved marginally. May 18 loans growth came in at 4.9%, a marginal improvement from Apr 18’s 4.8%. Overall, May 18 loans growth was underpinned by residential property (+8.8% yoy) and construction related loans (+9.4% yoy). Apart from working capital, other key loans segments that continue to remain weak: auto (-1.4% 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. As such, we have retained our full-year 2018 loans growth target of 5.0-5.5% with growth likely to come in at the lower end of our forecasted range.

Slight moderation in deposit growth. Overall deposit growth moderated to 4.9% yoy in May 18 (vs 5.6% yoy in Apr 18) whilst contracting 0.1% mom. We opine that the mom contraction could be partially due to greater withdrawal of domestic savings from the banking system allocated to investments in the capital market as the sharp decline due to the sell-off by foreign investors may have represented a buying opportunity for domestic investors. This led to a slight deterioration in LDR to 89.1% in May 18 from 88.8% in Apr 18. This, coupled with slower CASA growth of 5.1% yoy vs 2017’s 9.7%, would prompt banks to compete more aggressively for fixed deposit and hence offset some of the positive repricing gap from the recent interest rate hike.

GIL remains manageable. Gross impaired loans (GIL) were relatively flat yoy while inching up by 2bp mom to 1.60%. Non-residential property loans were the only key segment that saw a large deterioration in asset quality with its GIL rising 16.9% yoy.

Smooth transition expected with new governor. We do not expect a drastic change in overall policies by BNM with the appointment of Datuk Nor Shamsiah Mohd Yunus as the new BNM Governor, given the fact that she has been in BNM since 1987 and had played a key role in the preparation and the implementation of the Financial Sector Masterplan for the development of the Malaysian financial system from 2001 to 2010.

Maintain MARKET WEIGHT. Post-GE14 macro policy uncertainty could have a slight dampening effect on sector growth and hence result in slight downside risk to earnings. Given this scenario, we advocate a two-pronged strategy to navigate the potentially volatile near-term sector outlook, with a focus on banking stocks with defensive earnings qualities and those that have been excessively sold down due to sentiment rather than material changes in fundamentals. In this respect, we like Public Bank for its defensive qualities and status as a proxy to the consumer and SME segments and CIMB as we believe the selldown on its share price has been excessive, with the group still expected to chart a double-digit earnings growth recovery in FY18 on the back of lower provisions. As for Maybank, despite a sharp retracement in share price, provision risk from its exposure to financially distressed Hyflux remains a concern.

Source: UOB Kay Hian Research - 2 Jul 2018