Investment Highlights

• Industry loan growth increased to 4.8%YOY with a higher household and non-household loan growth. On a year-to-date (YTD) basis, industry loan growth was unchanged at 4.8% annualised. We maintain our loan projection of a 5.0% growth for 2018 premised on a GDP growth of 5.5%.

• Improvement in growth of loan applications. April 2018 saw the growth in industry loan applications improving further to 20.1%YoY vs. 0.02%YoY and -5.8%YoY in Mar and Feb 2018 respectively. Growth in non-household loan applications picked up pace to 34.7%YoY in Apr 2018 compared to 11.4%YoY in Mar 2018. Meanwhile, household loan applications expanded at a faster pace of 10.1%YoY.

• Higher deposit growth in Apr 2018 contributed by a stronger individual deposit growth. Industry deposit growth increased to 5.6%YoY, up from 5.2%YoY in the preceding month, underpinned by a stronger individual deposit growth of 3.9%YoY (Mar 2018: 3.3%YoY) while growth in business deposits slipped to 11.4%YoY (Mar 2018: 12.4%YoY). Nevertheless, with a stronger loan growth, the industry LD ratio remained stable at 88.8%. The sector’s liquidity remained healthy based on a loan-to-fund ratio and loan-to-fund and equity ratios of 82.7% and 72.2% respectively. CASA ratio for the sector inched down to 26.8% (Mar 2018: 26.9%) while the LCR rose to 145.0%.

• No change in weighted base rate and average lending rate (ALR). The sector's weighted ALR and base rate stayed unchanged at 5.43% and 3.89% respectively. BLR remained at 6.90%. The average deposit rate (the average rates for FDs of up to 1-year tenure) was steady at 3.21%. Interest spread (using the difference of the weighted average lending rate and 3-month FD rate as proxy) was stable at 2.26%.

• Upticks in impaired loans in Apr 2018 were lower than Mar 2018 and the industry GIL ratio remained stable at 1.6%. The industry’s outstanding impaired loans rose by 0.9%MoM. Nevertheless, the increase was smaller compared to Mar 2018’s 1.8%MoM which was due to the implementation of MFRS 9. The higher industry impaired loans was due to upticks in impairments of mortgage loans, loans for purchase of securities and vehicles. Meanwhile, on a comforting note, impaired working capital loans fell 0.2%MoM. Industry’s total GIL remained at steady 1.6% while the NIL ratio dropped slightly to 0.97% from 0.99% in Mar 2018. The sector’s loan loss cover edged up to 95.0% from 93.9% in Mar 2018 arising from higher total provisions.

• Capital ratios remained healthy. The sector's CET1, Tier 1 and total capital ratios for the banking sector remained stable at 12.9%, 13.8% and 17.2% respectively. Thus far, the day-1 impact on CET1 ratio of banks from the adoption of MFRS 9 has been manageable with RHB reporting a drop of 20bps, while Maybank, CIMB and BIMB had a decline of 39bps, 70bps and 32bps to the capital ratio respectively. Elsewhere, Public Bank reported an enhancement to its CET1 ratio of 20bps.

• Capital market activities continued to be more active on bonds than equities. The increase in MGS yields is expected to impact the level of issuance of bonds/sukuks ahead. Although a rising yield environment could be a push factor for some companies to issue bonds/sukuk earlier to try to lock in rates before it rises further, this could be challenging as investors are likely to be less eager to hold newer bonds.

• Maintain OVERWEIGHT on the sector. Our BUY calls are RHB Bank (FV: RM6.20/share), Public Bank (FV: RM26.20/share), Alliance Bank (FV: RM5.00/share), BIMB Holdings (FV: RM5.40/share) and CIMB (FV: RM7.00/share).

Source: AmInvest Research - 5 Jun 2018