• Broad money (M3) maintained in November

• Loan growth eased in November with broad-based moderation across all sectors

• Loan application surged in November

• Loan approval rate improved

• Impaired loan moderated in November

• Moderate growth of banking sector in 2018

Broad money inched up by 5.2% in November from 5.1% in the previous month. Fixed deposit, which contributed 47.9% to the total broad money, grew by 7.1% in November. Demand deposit and saving deposit increased 9.9% and 4.7% respectively in November. However the negotiable instruments of deposit (NID) slumped 10.9% in November as compared to 41.3% increase registered in the prior month. On monthly basis, the broad money continued to decelerate for three consecutive months (Nov: 0.3%; Oct: 0.6%; Sep: 0.9%). The narrow money supply or M1 eased 9.9% yoy or declined by RM36.6bn in November. Compared to the prior month M1 grew by 11.7%.

Slower loan growth. Loans growth for the banking sector slowed further and only increased by 3.9% in November (Oct: 4.6%; Sep: 5.2%; Aug: 5.8%). The moderation in loan growth was due to lower loans to the business sector (Nov: 2.2%; Oct: 4.1%), with broad-based moderation across the sectors, notably in manufacturing (Nov: 0.5%; Oct: 3.3%), transport, storage and communication (Nov: 1.4%; Oct: 8.8%), and real estate (Nov: 4.0%; Oct: 5.5%). Moreover, the sluggish loan growth was exacerbated by slower growth in finance, insurance and business services (Nov: -2.2%; Oct: -0.1%).

Household loans growth grew marginally higher in November at 5.2% from 5.1% posted in the previous month. The household sector holds about 57.6% over total loan registered in November.

Loan growth for the purchase of residential property maintained at 8.9% for two consecutive months. Purchase of non-residential property slowed down to 2.4% from 3.2% in October. On the other hand, loan growth for the purchase of passenger car dropped 1.0% after posted ten months of positive growth since January 2017. On monthly basis, total loans rose by 0.3% in November as compared to the previous month’s growth of 0.1%.

The annual growth of loan application climbed by 15.8% in November from 12.8% recorded in the previous month. The significant growth in November was driven by the main sectors which grew remarkably higher for the month. The growth of loan application for household sector expanded to 12.6% in November from 12.2% in the preceding month. Loan application for purchase of consumer durable goods improved remarkably by 6002.9% after dropping 67.2% in the earlier month. The loan application for personal use expanded 30.6% in November from 11.4% in October. The loan application for purchase of non-residential property increased by 15.7% in November (Oct: 14.2%). Besides the household sector, the notably increase in the loan application was also contributed by primary agriculture sector as it spiked by 428.4% in November from 47.1% increase in October. Furthermore, loan application for construction sector jumped to 55.2% from 46.9% in the preceding month. The loan application growth was also underpinned by transport, storage and communication as it rebounded to 12.2% after registering a negative growth for two consecutive months (Oct: - 20.6%; Sep: -66.4%). On monthly basis, the loan application growth was moderated to 6.0% from 13.6% registered in October. Demand from the household sector eased to 1.4% mom after posting 11.2% increase in the prior month. Bulk of the total loan applications came from household sector (51.3%).

Marginally higher growth in total deposits. Total deposits inched up to 4.9% yoy in November from 4.8% in the preceding month. Bulk of the total deposit came from individual (37.6%) which maintained at 3.8% of growth since October 2017. Deposit from business enterprises stabled at 11.1% in November (Oct: 11.2%) while deposit from financial institution improved to 0.7% (Oct: -1.0%). Furthermore, deposit from state government expanded to 6.7% from 3.4% in the previous month. On monthly basis, the deposit growth grew by 0.3% as compared to 0.6% posted in October.

Moderate growth of banking sector in 2018

With growing trend of economy in 2017, we expect the banking sector to register a healthy loan growth rate this year. Loan growth is anticipated to grow at a slightly faster pace of 5.4% in 2017 from 5.3% in 2016. Banking system remained vibrant as all financing indicators expanded following strong economic performance and this could support loan growth in 2017. Better private consumption which contributed by wages growth and healthy labour market condition lead to a higher loan growth in 2017 as compared to the previous year. Nevertheless, moving forward we expect banking sector to move at the slower pace. The loan growth for 2018 is forecasted to be lower at 5.2% as compared with 2017 mainly due to the expectation of a slower growth in household loans amid continued stringent rules on lending by banks. This may however partially offset by pick-up in business loans given stronger economic activity.

The possibility of the rate hike in Overnight Policy Rate (OPR) by 25bps to 3.25% in 2018 by Bank Negara Malaysia (BNM) could affect the performance of banking sector. The interest rate hike is likely to increase the cost of borrowing and would lead to the lower purchasing power for business and household sector. Furthermore, the mortgage interest payment would also be more expensive after the rate hike and this could also affect spending by private sector. On the other hand, the OPR hike will likely stimulate wider margin for banking sector next year. Individual banks would probably receive different impact on this hawkish monetary policy as it will be based on their portfolio; composition of variable interest rate and fixed interest rate loan. Banks that have higher portion of the variable rate loans would be positively impacted. Even though the interest rate hike might give silver lining to the banking sector through the anticipation of higher profit growth, the optimistic impact might be offset by a slower loan growth as a result of rate hike. Apart from the expectation of interest rate hike next year, the implementation of Malaysia Financial Standard Reporting 9 (MFRS 9) that will take effect on January 1, 2018 is also projected to be a game changer for Malaysian Banks. This new accounting standard requires banks to estimate expected credit losses throughout the lifetime of the loans given. The main aim of this new approach is to address a key concern that had arisen during the global financial crisis as the credit losses are recorded too late in the economic cycle. MFRS 9 requires banks to make appropriate provisions in anticipation of future potential losses, rather than the current practice of providing only when losses are incurred. A new impairment model based on expected credit losses will be introduced to bring forward the recognition of credit losses. In addition, this new approach might see the bank adopting a more risk-based approach in performing their business strategies. As larger provision is needed to act as a buffer in case of credit losses coupled with additional cost related to MFRS 9, bank’s loan pricing strategies are also likely to be affected. Repricing or restructuring loans might take place after decision on higher provisioning is made and would likely transfer the cost to the borrower.

The growth of total non-performing loan (NPL) has been moving upward since 2016 (2017YTD: 6.0%; 2016: 6.9%; 2015: -0.5%). With the implementation of MFRS9 which will take effect on January 1, 2018, together with the anticipation of interest rate hike, it is estimated that the NPL would grow higher in 2018. This is because the impact of rate hike and MFRS9 could increase the cost of borrowing and this affect the repayment capability of the borrower. As this new accounting standard would also base on the creditworthiness of the borrower, it will make the loan more expensive to those who has a higher tendency of default or riskier credit profile. This definitely will lead to a higher impaired loan in 2018 as the borrower could not cope with the higher borrowing cost. Moreover, most banks in Malaysia are expected to have adequate levels of capital or regulatory reserves to absorb the impact of higher loan-loss allowances. They might have to set aside a huge amount of provision which could hurt their earning and may transfer this cost to the borrower as the loans getting more expensive. However, banks with large regulatory reserves (RR) relative to existing provision buffers will be able to utilise their RR to offset the increase in provision requirement emanating from the IFRS 9 adoption. All in all, the likelihood of the OPR hike and the implementation of MFRS9 next year may be the main factors that would impact the performance of banking sector. The influences that will be given by these two catalysts might be reflected on the loan growth and non-performing loan in 2018 with anticipation of slower loan growth and higher non-performing loans growth correspondingly.

Source: BIMB Securities Research - 2 Jan 2018