• Loans growth slowed to 8.8% yoy on deceleration in both household and business (repayments matched disbursements) segments.

• Leading Indicators (applications and approvals - LI) fell mom but contrasting yoy comparison with applications reversed to growth while approvals reversed to contraction. Both business LI double-digit growth while both household LI contracted. Approvals rate decreased below 50% mark mainly on business but partly offset by higher household.

• Deposits contracted mom, culminating in deceleration of yoy growth albeit above 8% for three consecutive months. LD ratio higher with excess liquidity decreased to RM316bn.

• Average lending rate (ALR) and spread lower but still off low.

• Asset quality improved and at strongest level. Capital ratios declined slightly but remained robust.

Our Take

• We are keeping our 2015 loans growth projection at 8% despite strong YTD growth given uncertainties in 2Q post GST implementation, lower LI and lower approval rate. The contrasting yoy comparison of business and household LI is in line with our expectations of business segment mitigating the expected slowdown in household.

• Mom contraction in deposits mainly due non-household while household deposits continue to expand mom with acceleration in yoy growth (narrowing the gap with household loans growth). With liquidity still ample (albeit lower), we are not overly concerned unless the contraction prolongs.

• Decline in ALR coupled with intense competition for deposits suggest continued pressure on NIM.

• Strong asset quality and robust capital ratios intact and wil l support growth and active capital management.

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

• Posi tives – Best proxy to 11MP and RAPID, domestic consumption (albeit slower) and economy; strong asset quality, robust capital ratios, capital management and M&As.

Negatives

• Competitive pressure on margin, GST impact on consumer sentiment, tougher environment increase chances of higher defalts and portfolio losses from foreign outflow.

Top Picks

• Maybank and RHB Cap.

Source: Hong Leong Investment Bank Research - 1 Jun 2015