Investment Highlights

• Industry loan growth rose to 4.1% YoY in Dec 2017 from 3.9% YoY in the preceding month contributed by stronger growth in business loans. The sector’s loan growth accelerated to 4.1% YoY in Dec 2017 as non-household loans rose to 2.8% YoY, up from 2.3% YoY in Nov 2017 while household loansgrowth continued to be stable at 5.1% YoY. This was lower than our expectation for a 5.0-6.0% growth in 2017 due to higher business loan repayments. We believe that some of the business loans have been refinanced by corporate bonds. Net financing (inclusive of corporate bonds) grew 6.9% YoY. For 2018, we are projecting an industry loan growth of 5.0% with corporate loans likely to grow at faster pace coming from a low base in 2016 while household loan growth is expected to remain stable.

• Growth in loan applications declined in Dec 2017. Growth of industry loan applications in Dec 2017 decelerated to -2.1% YoY vs. 15.8% YoY in the preceding month. Both the levels of household and non-household loan applications were lower in the final month of 2017.

• Industry deposit growth slipped to 4.1% YoY due to slower growth in business enterprises’ deposits matching the system’s loan growth rate. Growth in business enterprise deposits slipped to 7.9% YoY while individual deposit growth was stable at 3.9% YoY. CASA ratio for the sector rose to 27.8%. The sector’s LD ratio increased slightly to 89.8%. Banks’ funding profiles remain diversified with the sector's loan-to-fund ratio and loan-to-fund & equity ratios standing at 84.0% and 73.7% respectively. LCR for the sector slipped to 134.0% from 138% in the preceding month, and stayed well above the minimum regulatory requirement of 100.0%

• Weighted base rate and average lending rate remained stable at 3.64% and 5.22% respectively. Interest spread (between the weighted average lending rate and 3-month FD rate) was marginally higher by 1bps MoM to 2.28%. With the increase in OPR by 25bps in Jan 2018 to 3.25%, base rate and BLR of banks will rise by a similar quantum. Based on our assessment, a 25bps hike in interest rate will have a mild booster to banks’ net profits, rising by 0.9% to 2.4% with Alliance Bank as the biggest beneficiary followed by RHB Bank. We now expect another OPR hike of 25bps in 2H18.

• Industry asset quality remained stable. Industry GIL and NIL ratios improved 10bps to 1.5% and 1.1% respectively as impaired loans declined by 3.7% MoM. GIL ratios for loans to all sectors remained stable. The sector loan loss cover was 82.9% as at the end of Dec 2017.

• The level of net funds raised by the private sector was significantly higher by 139.7% YoY with a higher issuance of bonds than equities. We continue to see the trend of higher issuance of corporate bonds and/or sukuk compared to equities.

• Healthy capital ratios. CET1, Tier 1 and total capital ratios for the banking sector were stable at 13.3%, 14.3% and 17.1% respectively.

• We maintain OVERWEIGHT on the sector. Our BUY calls are on RHB Bank (FV: RM6.00/share), Public Bank (FV: RM24.30/share) and ABMB (FV: RM4.40/share). We have raised our FV for Public Bank to RM24.30/share from RM22.20/share, pegging to stock to FY18 P/BV multiple of 2.3x (previously: 2.1x) supported by an ROE of 14.0%. We have also revised our fair value for Maybank higher to RM9.80/share from RM9.10/share based on 1.4x FY18 P/BV (previously 1.3x) with an ROE of 10.7%. The higher forward P/BV for both Public Bank and Maybank are based on a lower cost of equity on the Gordon Growth model. Meanwhile, we have downgraded CIMB from BUY to HOLD with a fair value of RM7.05/share derived on a FY18 P/BV of 1.3x with a ROE of 10.5%. This stock is fully valued in our opinion with the recent strong run-up in share price.

Source: AmInvest Research - 2 Feb 2018