Investment Highlights

• Industry loan growth gained ground to 5.0%YoY in June 2018 from 4.9%YoY in May 2018 with an improvement in both household and nonhousehold loans. On a year-to-date (YTD) basis, industry loan growth surged to 5.2% annualised vs. our expectation of a 5.0% growth for 2018.

• Loan applications and approvals picked up in June 2018, particularly loans for purchase of passenger cars. June 2018 saw the growth in industry loan applications climbing to 13.3%YoY from -9.2%YoY in May 2018. Both household and non-household loan applications were higher in June 2018. Growth in applications and approvals for loans to purchase of passenger cars, personal loans and credit cards improved in line with the expected increase in consumer spending taking advantage of the tax holiday (3-month period between the implementation of zero-rated GST on June 1 and the reintroduction of the sales and services tax [SST] on Sept 1).

• Industry deposit growth gained traction in June 2018 contributed by higher individual and business deposit growth. Industry deposit growth rose to 5.2%YoY from 4.9%YoY in the preceding month underpinned by an improvement in growth of business deposits to 9.0%YoY (May 2018: 8.8%YoY) and individual deposits to 5.4%YoY (May 2018: 4.2%YoY). Industry CASA growth fell to 3.9%YoY resulting in a slightly lower CASA ratio of 26.7%. With a stronger industry loan growth, industry LD ratio inched up to 89.7% from 89.1% in the previous month. The sector’s liquidity improved based on a loan-to-fund ratio and loan-to-fund and equity ratios of 83.9% and 73.2% respectively (May 2018: 83.0% and 72.5%).

• Higher average lending rate (ALR). The sector's weighted ALR rose to 5.55% compared to 5.43% in the preceding month while the weighted base rate stayed unchanged at 3.89%. The average deposit rate (the average rates for FDs of up to 1-year tenure) dropped slightly to 3.18%. Interest spread (using the difference of the weighted average lending rate and 3-month FD rate as proxy) rose to 2.4% (2.28% in May 2018) due to a higher ALR. For 2H18, we continued to expect the OPR to be maintained at 3.25% based on the headline inflation which is still expected to be low.

• Slight uptick in impaired loans in June 2018 by 0.1%MoM contributed by impairments of mortgage loans with the industry GIL ratio remaining stable at 1.6%. Industry’s NIL ratio rose to 1.04% from 0.99% in May 2018. The sector’s loan loss cover slipped to 93.8% from 94.4% in May 2018 due to a slightly higher impaired loans and lower provisions.

• Capital ratios remained healthy. The sector's CET1, Tier 1 and total capital ratios for the banking sector was 12.7%, 13.5% and 17.0% respectively.

• Still a slower pace in new issuance of bonds and sukuks amidst the tightening of liquidity and the increase in MGS yields. Cumulative net funds raised in the market by the private sector for the first six months of 2018 was RM33.2bil, a decline of 25.7%YoY, with a lower net issuance of new issuance of bonds/sukuks by 15.7%YoY while capital market activities for equities remained slow. Foreign holdings of MGS improved slightly in Aug 2018 to 40.3% vs. 40.1% in July 2018.

• Valuation remains attractive for banks and we 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 - 1 Aug 2018