Latest Trends 

Loans growth for May 14 decelerated to 9.7% vs. 10% in Apr 14 on lower business but partly offset by higher household.

Applications increased but approvals fell. Approval rate declined mom to remain below the 50% mark for four consecutive months.

Deposits growth decelerated and still lagged way behind loans expansion. LD ratio slightly higher with excess liquidity slightly lower but ample at RM293bn.

Average lending rate (ALR) fell 5bps to near record low after sustaining for two consecutive months.

Asset quality stable. Transport and construction continued to deteriorate.

Capital ratios fell but remained robust.

Our Take

Maintain loans growth projection of 10% for 2014. Demand remained relatively strong with applications above RM60bn for three consecutive months while expecting ETP and O&G projects to revive business segment.

ALR should remained stable if not higher with recent HP rates hike and our expectation of a 25bps OPR hike in Jul. Rate hike is generally positive for the sector but temporary while continued competition for loans and deposits could further limit the potential benefits.

Asset quality to continue hold up well. However, rate of improvement expected to stagnate, reducing potential of provision as a major earnings driver.

Robust capital ratios to support active capital management, especially with several banks adopting DRP.

Risks

Risk of recession and its impact on asset quality, portfolio losses (MTM and realized), non-interest income growth as well as more macro prudential measures.

Rating

NEUTRAL

Positives – Best proxy to the impact of ETP (sector with third highest multiplier effect), domestic consumerism (albeit slower) and economy, strong asset quality, robust capital ratios, capital management and M&As.

Negatives – Competitive pressure on margin, potential of higher living costs which would increase the possibility of rise in delinquencies, portfolio losses from foreign outflow and rising burden of low income group.

Top Picks

Maybank, RHB Cap and AFG.

Source:Hong Leong Investment Bank Research - 1 Jul 2014