Jun 18 loans growth came in at 5.0%, the lower end of our 5.0-5.5% full-year forecast, as working capital loans growth, which had been expected to recover, remained lacklustre. On a brighter note, asset quality remains stable. Maintain MARKET WEIGHT as the 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.

WHAT’S NEW

Jun 18 loans growth improved marginally. Jun 18 loans growth came in at 5.0%, a marginal improvement from May 18’s 5.0%. Overall Jun 18 loans growth was underpinned by residential property (+8.3% yoy) and construction related loans (+10.8% yoy). Apart from working capital (+2.3% yoy), other key loans segments that continued to remain weak are auto (-1.1% yoy) and non-residential property (+2.6% yoy). It is too early to gauge the impact of loans growth impact post GE14, as potentially stronger auto and consumer durables 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. Loans approval growth was steady at 5.4% yoy but largely driven by a spike in auto loans approval (+54% yoy) as zero-rated GST took effect. Excluding this lumpy effect, overall loans approval would have declined 3% yoy.

Deposit growth remained stable but driven by more expensive fixed deposits. Deposits growth remained stable at 5.2% yoy in Jun 18 (+4.9% yoy in May 18) leading to relatively stable LDR of 89.7%. However, CASA growth slowed down to 3.8% yoy vs 2017’s 9.4%, whereas fixed deposit growth increased from 2.2% in 2017 to 3.7% in 2018. We noted that the impact of slower CASA growth and stronger fixed deposit growth has had an impact on overall funding cost in the bank’s 1Q18 NIM which only increased by a marginal 1bp despite the benefits of the 25bp overnight policy rate hike.

GIL remained manageable. Gross impaired loans (GIL) were relatively flat yoy, with GIL ratio improving 1bp to 1.59%. Non-residential property loans were the only key segments that saw a large deterioration in asset quality with its GIL rising 16.0% yoy.

Maintain MARKET WEIGHT. Post-GE14 macro policy uncertainty could have a slight dampening effect on overall sector growth and hence result in 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 high single-digit growth recovery in FY18 on the back of lower provisions. As for Maybank, despite a sharp retracement in share price, valuation at 1.40x FY18F P/B is still expensive relative to CIMB’s 1.05x P/B. In addition, provision risk from Maybank's exposure to financially distressed Hyflux remains a concern.

Source: UOB Kay Hian Research - 1 Aug 2018