• Broad money (M3) slowed in December

• Loan growth rose slightly in December with broad-based moderation across all sectors

• Loan application slumped in December

• Loan approval rate was at the highest in five years

• Impaired loan declined in December

• Eye on banking sector as OPR hike by 25 basis point

Broad money slowed to 4.7% in December from 5.2% in the prior month. Fixed deposit eased to 6.4% in December from 7.1% rise in the previous month and contributed 47.8% to the total broad money. Demand deposit and saving deposit rose by 11.8% and 3.7% respectively. Nevertheless, the negotiable instruments of deposits (NID) posted two consecutive months of negative growth (Dec: - 2.1%; Nov: -10.9%). On monthly basis, the broad money stable at 0.3%, same as the preceding month. The narrow money supply or M1 up 11.0% yoy or increased by RM41.9bn in December from 9.9% in the prior month.

Slightly higher loan growth. Loans growth for banking sector increased slightly to 4.1% in December from 3.9% in the previous month. The growth was prompted by the loans to the business sector despite it continued to post below 3.0% (Dec: 2.8%; Nov: 2.3%), with broad-based moderation across the sectors, particularly in wholesale, retail, restaurants and hotels (Dec: 2.6%, Nov: 3.2%). On the other hand, loans to the manufacturing sector declined by -0.1% in December from 0.5% rise in the prior month as well as transport, storage and communication sector which dropped 3.0% (Nov: 1.45%). The slower growth was also dampened by the following sectors which registered two

consecutive months of negative growth; financing, insurance and business services (Dec: -2.6%; Nov: - 2.2%), education, health and others (Dec: -3.2%; Nov: -2.3%), and primary agriculture (Dec: -0.2%; Nov: -1.5%). Household loans grew marginally lower in December at 5.1% from 5.2% posted in the previous month. The household sector holds about 57.3% over total loan registered in December. Loan growth for the purchase of residential property maintained at 8.9% for two consecutive months while purchase of non-residential property decelerated further since September (Dec: 3.7%; Nov: 3.2%; Oct: 2.4%; 2.1%). Beside those, loan for the purchase of passenger car has been recording a negative growth since January 2017 (Dec: -1.1%; -1.0%). On monthly basis, total loans rose by 1.1% in December as compared to the previous month’s growth of 0.3%.

The yoy growth of loan application slumped to -2.1% in December from a significant increase of 15.8% recorded in November. The receded growth was mainly driven by the broad-based declining of application across the sectors; manufacturing (Dec: -10.7%; Nov: -10.9%), construction (Dec: -27.3%; Nov: 55.2%), transportation (Dec: -17.1%; Nov: 12.2%), financial intermediation (Dec: -24.6%; Nov: - 60.3%) and retail trade (Dec: -19.5%; Nov: -27.6%). Furthermore, the growth of loan application for household sector eased to 6.8% in December from 12.6% in the preceding month. The loan application for purchase of residential property, non residential property and personal use moderated to 9.4% (Nov: 18.3%), 6.5% (Nov: 15.7%) and 24.6% (Nov: 30.6%) respectively. The notably decrease in the loan application was also contributed by a decline in application for purchase of passenger car which showed a prolong drop since August 2017 (Dec: -11.5%; Nov: -6.5%) coupled with loan application for credit cards, fell by -2.3% (Nov: -1.1%).

in the preceding month. Demand from the household sector declined by -20.8% mom after posting 1.6% increase in November. Bulk of the total loan applications came from household sector (58.8%).

Highest approval rate in five years. The annual growth of loan approval grew by 15.4% (Nov: 22.3%) while monthly growth declined 7.7% (Nov: 10.5%) in December. Overall, the approval rate by banks surged to 59.2% from 44.3%. It was the highest approval rate ever recorded in five years since November 2012 (64.9%). Bulk or 27.1% of total loan approved were for working capital while purchase of residential property hold 19.8% over total loan approved.

Gross impaired loans. The banking sector’s non-performing loans fell by 1.0% in December from 2.9% in November. It was the first negative growth of impaired loans in two years since October 2015 (- 0.1%). As at December 2017, total impaired loans amounted to RM24.3bn, which was lower than the same month of last year’s RM24.5bn. Impaired loans from the household sector was lower in December, at RM9.2bn.

Lower growth in total deposits. Total deposits slowed to 4.0% yoy in December from 4.9% in the preceding month. Bulk of the total deposit came from individual (37.9%) which increased marginally at 3.9% from 3.8% in the prior month. Deposit from business enterprises eased to 7.9% in December (Nov: 11.1%) while deposit from financial institution dropped by -1.4% (Nov: 0.7%). Furthermore, deposit from state government moderated to 5.0% from 6.7% in the previous month. On monthly basis, the deposit growth plummeted by -0.09% as compared to 0.3% posted in November.

Eye on banking sector as OPR hike by 25 basis point

Overall, the banking loan growth grew by 5.3% in 2017 and we anticipate that the growth to be lower in 2018. This is mainly due to the expectation of a slower growth in household loans amid continued stringent rules on lending by banks. Nevertheless, it might be offset by expanding in business loans given stronger economic activity. Recent OPR hike by Bank Negara Malaysia could be a major indicator for Banking sector’s performance throughout the year. The decision to normalize the OPR was backed by the firm growth of the economy and the monetary policy committee (MPC) want to ensure the stance of monetary policy is appropriate to prevent the build-up of risks that could happened from a prolonged time of

maintaining the low interest rates. The interest rate hike is likely to increase the cost of borrowing and the mortgage interest payment would also be more expensive which could diminish the purchasing power of the borrower. This might lessen the demand on loan by the household sector. The NPL is expected to be higher this year since the rate hike could probably affect the repayment capability of the borrower. On the flipside, this hawkish monetary policy is expected to benefit the margin of banking sector if the banks hold higher position of variable rate loans in their portfolio.

Source: BIMB Securities Research - 2 Feb 2018