Latest  Trends

• Loans growth accelerated to 9.1% yoy vs. 8.9% despite slower business and household expansion.

• Leading Indicators (applications and approvals - LI) increased mom and all registered positive yoy growth except for household approvals. Meanwhile, business approvals grew by double-digit for 4 consecutive months. Approvals rate jumped above the 50% mark driven by business while household also improved though still below 50%.

• Deposits finally recorded mom increase (after two consecutive months of declines) although yoy growth was slower. LD ratio higher with excess liquidity decreased to RM296bn.

• Average lending rate (ALR) and spread lower. Average for 2Q lower sequentially.

• Asset quality deteriorated slightly but not alarming and near strongest level. Capital ratios higher and remained robust.

Our Take

• Keeping our 2015 loans growth projection at 8% despite stronger YTD growth given higher base. The performance of LI is in line with our expectations of stronger business segment mitigating the expected slowdown in household.

• As highlighted previous, we were not overly concerned about the mom contraction in deposits during Apr-May unless it prolongs. The recovery in Jun and uninterrupted mom increase in household deposits suggest that the liquidity position in the system is still healthy with low risk of financial disintermediation.

• Decline in ALR with 2Q average lower sequentially and intense deposits competition suggest that 2Q reporting season would see continued margin pressure.

• Solid asset quality and capital ratios intact to support growth.

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 - 3 Aug 2015