Monetary Conditions

Money supply growth was broadly stable in June, with M3 growth edging up slightly to 5.6% yoy from 5.5% yoy in May (which was slowest in almost five years) (Figure #1). Meanwhile, M1 (mainly for transaction needs) recovered to a double-digit growth of 10.2% yoy (May: +9.6% yoy). In June, loan disbursement growth picked up to 10.5% yoy (May: +6.6% yoy) while BNM reserves rebounded to increase by US$1.0bn (May: -US$0.3bn).

The stable money supply growth suggests that domestic economic activity was firmer in June after softening in Apr- May period. For 2Q14, we expect GDP growth to have eased to 5.5% yoy (1Q14: +6.2% yoy). We maintain our 2014 GDP forecast at 5.5%, with quarterly GDP growth tapering off due to higher base and fading of export boost.

Loan & Deposit

Household loan growth eased slightly to 11.5% yoy (May: +11.6% yoy) while household deposit stabilized at 5.9% yoy. The divergence between household loan and deposit growth remained large (Figure #3), which could imply that broad interest rates are no longer at equilibrium. Shall this trend continues and GDP growth surprises on the upside, BNM may announce more rate hikes to correct the impact of negative real interest rates to prevent structural change in consumer’s risk-taking behavior.

Loan growth for purchase of residential properties remained strong at 13.6% yoy. Loan application for such purpose continued to grow at a marginal rate of by 1.4% yoy or 0.9% mom (May: +9.7% yoy or +4.4% mom). This successive growth in housing loan application could suggest that impact of property measures in late-2013 has dissipated. This development may had lent support to July OPR hike to realign broad interest rate levels.

Business loan growth moderated further to 7.2% yoy (May: +7.9% yoy). Meanwhile, the PDS market reversed to show a net issuance of RM3.5bn after a net redemption of RM2.5bn in May. Prior to May, there has been eight consecutive months of net issuance (cumulative of RM29.3bn).

At this juncture, we maintain our view that BNM will stay pat after the July OPR hike. However, September rate decision is still very much data dependent. The impact of July rate hike on loan-deposit behaviour as well as the degree of GDP growth tapering in 2Q will be crucial to influence the MPC decision on the OPR.

Liquidity

Excess liquidity in the banking system was mixed but remained ample in June. Deposit-loan gap inched lower to RM291.5bn (May: RM292.6bn) (Figure #4). Meanwhile, surplus liquidity (New Liquidity Framework) picked up to RM129.4bn as at end-June from RM122.3bn the prior month (Figure #6).

Foreign holding of debt securities remained high in June, easing only RM1.3bn to RM248.2bn from a record high level of RM249.5bn in May. The slightly lower foreign holding was due to lower BNM bills (-RM0.6bn to RM50.2bn) and BNM Islamic notes (-RM4.9bn to RM26.6bn) which was partially offset by a record high level of foreign holding of MGS (+RM2.6bn to RM147.3bn).

Source: Hong Leong Investment Bank Research - 1 Aug 2014