- Key credit buffers are adversely impacted. Malaysia’s key credit buffers including foreign reserve coverage and economic growth trajectory have been adversely impacted owing to the weak economic sentiments and outflows of capital. Other than that, softer net exports signals added downside risk for the economy in 3Q15. Despite the weak Ringgit and forex translation gains, balance of payment probably slipped in 3Q15 on the back of outflows of funds. That said, the banking system remains well-capitalised in tandem with healthy loans growth. Also, the household segment continues to be supportive of loans growth during the start of 3Q15.

- Banking system remains well-capitalised. Total loans growth stood at 9.1% and 9.6% YoY in June and July, respectively. Foreign currency loans accounted for 5.4% of total loans that amounted to RM75.1bil in July 2015. Nonetheless, the percentage contribution of foreign currency loans to total loans has advanced from 3.4% as at end-2013. Also, the amount of foreign currency loans has risen sharply over the recent months on the back of the weaker-than-expected Ringgit. In June and July, the foreign currency loans surged by 54.3% and 61.5% YoY, respectively. On a YTD basis, foreign currency loans had increased by 24.1%.

- Foreign currency deposits slowed to 16.4% in July. On the other hand, both total deposits and foreign currency deposits slowed in July. Foreign currency deposits growth softened to 16.4% YoY (vs. +21.6% in June), amounting to RM108.8bil in July. It accounted for 6.6% of total deposits in the banking system. Foreign currency deposits during the recent months have posted a deeper slowdown compared to the total deposits growth for the financial system. Total deposits slowed drastically to RM1,643.4bil (or +4.5% YoY) in July vs. +7.7% in June.

- Healthy loans growth, supported by household segment. Loans growth for the household sector stood at 8.6% YoY in July, broadly unchanged compared with +8.7% in June. Also, other economic segments including wholesale and retail, manufacturing, construction, transport and mining were supportive of the 9.6% loans growth in July (vs. +9.1% in June). Loans growth for the household segment was stable in July compared to June but has moderated significantly from +9.9% as at end- 2014.

- Mixed economic performance. Healthy loans growth during the start of 3Q15 suggests that the economy is supported by key economic segments including household spending. However, we anticipate a moderation in domestic demand due to the YoY slowdown in terms of domestic investment. Also, softer net exports signals added downside risk for the economy in 3Q15. Despite the positive growth in exports, trade balance tapered drastically to RM2.4bil in July, compared with the surplus of RM8bil in June. On a YTD basis, net trades had contracted by 9.0% YoY to RM44.1bil, suggesting that the economy had moderated considerably in 2015 compared to 2014.

- Weaker-than-expected Ringgit in 3Q15. Mainly, Malaysia’s economic landscape has gradually shifted from exports-driven to a domestic-led economy. Generally, trade oriented segments of the economy are highly susceptible to forex volatility. Nonetheless, the percentage contribution of net trades to GDP has declined over the years. As a whole, Malaysia’s net trades accounted for 8.1% of real GDP in 2Q15 vs. a high of 21.9% in 1Q10. Also, total exports share of GDP fell to 70% in 2Q15. This is in contrast to 2008 when the ratio of export-to-GDP exceeded 100%.

- International reserves deteriorated by RM38.0bil from end-2Q15. The reserves at BNM had increased by USD0.6bil from end-August (or +0.6%) to USD95.3bil as at mid-September 2015. The reserves level is able to finance 7.3 months of retained imports and is 1.1x the short-term external debt. In Ringgit terms, international reserves as at mid-September stood at RM360.1bil (or -RM38.0bil from end-June). As such, balance of payment (BOP) is likely to revert to negative during 3Q15. In 2Q15, BOP surged to a surplus of RM8.5bil (1Q15: -RM15.7bil), owing to the inflows in the financial account.

Source: AmeSecurities Research - 23 Sep 2015