Investment Highlights

• Industry loan growth improved slightly to 4.9%YoY in May 2018 from 4.8%YoY in April 2018 with a higher non-household loan growth while growth in household loans remained stable. On a year-to-date (YTD) basis, industry loan growth was 4.6% annualised.

• Slower growth of loan applications in May 2018. May 2018 saw the growth in industry loan applications declining to -9.2%YoY from 20.1%YoY in April 2018. Both the growth in household and non-household loan applications moderated in May 2018. With the expected increase in consumer spending between the implementation of zero-rated GST on June 1 and the reintroduction of sales and services tax (SST) on Sept 1, we anticipate an improvement in loan applications ahead.

• Slowdown in deposit growth in May 2018 contributed by decline in business deposit growth. Industry deposit growth decreased to 4.9%YoY from 5.6%YoY in the preceding month underpinned by a decline in growth of business deposits to 8.8%YoY (Apr 2018: 11.4%YoY) while growth in individual deposits rose to 4.2%YoY (Apr 2018: 3.9%YoY). With a slower deposit growth, industry LD ratio inched up to 89.1% from 88.8% in the previous month. The sector’s liquidity continued to be healthy based on a loan-to-fund ratio and loan-to-fund and equity ratios of 83.0% and 72.5% respectively (April 2018: 82.7% and 72.2%).

• 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 3.20%. Interest spread (using the difference of the weighted average lending rate and 3-month FD rate as proxy) inched higher to 2.28% (2.26% in Apr 2018). For 2H18, we expect the OPR to be maintained at 3.25%. This is based on the headline inflation, which is still expected to be low, while the ringgit is still expected to trade within our fair value projection despite the slight weakening against the USD recently.

• Upticks in impaired loans in May 2018 contributed by impairments of household loans (mortgage loans, loans for purchase of securities, vehicles, personal loans and credit cards) but the industry GIL ratio remained stable at 1.6%. The industry’s outstanding impaired loans increased by 1.7%MoM vs. an increase of 0.9%MoM in April 2018. Industry’s NIL ratio rose to 0.99% from 0.97% in April 2018. The sector’s loan loss cover slipped to 94.4% from 95.0% in April 2018 due to higher impaired loans.

• Capital ratios remained healthy. The sector's CET1, Tier 1 and total capital ratios for the banking sector were 12.9%, 13.7% and 17.1% respectively.

• Slowdown in new issuance of bonds and sukuks amidst the tightening of liquidity and the increase in MGS yields. Year to date, the new net issuance of corporate bonds/sukuk was RM30.3bil vs. RM37.3bil for the corresponding period in 2017. Domestic financial markets experienced selling pressure by foreign investors. Nevertheless, after consecutive days of selldowns, foreign investors turned net buyers of domestic equities last Friday while the S&P Global Rating has reaffirmed Malaysia’s ratings with a stable outlook.

• Maintain OVERWEIGHT on the sector. Our BUY calls are RHB Bank (FV: RM6.10/share), Public Bank (FV: RM26.20/share), Alliance Bank (FV: RM5.00/share), BIMB Holdings (FV: RM5.40/share), CIMB (FV: RM6.80/share) and Maybank (FV: RM10.70/share).

Source: AmInvest Research - 2 Jul 2018