Latest Trends

• Loans growth faster at 9.7% yoy vs. 9.1% underpinned by business acceleration which more than offset slightly slower household expansion.

• Leading Indicators (applications and approvals - LI) mixed with applications higher (from business) but approvals lower (both business and household). Although business approvals lower, both business LI recorded double-digit yoy growth. Approvals rate fell below 50% mark.

• Deposits fell sharply mom, yoy growth only 4.5% vs. 7.7%. LD ratio signi ficantly higher at 85% (89% ex financial institutions and Cagamas) resulting in lower excess liquidity (LD gap) of RM247bn.

• Average lending rate (ALR) and spread lower.

• Asset quality stable and near strongest level. Capital ratios jump and remained robust.

Our Take

• Keeping our 2015 loans growth projection at 8% despite stronger YTD growth given higher base and sharp jump in LD ratio. Overall LI trends in line with our expectations of stronger business segment mitigating expected household slowdown.

• While liquidity still ample to fund domestic economic growth, sharp mom drop and signi ficantly higher LD ratio could raise some concerns. Contraction mainly from financial institution and business enterprises while household decline slightly mom with still healthy growth rate of 6.7% yoy vs. 7.1%. LD ratio also still lower than levels prior to 2004.

• Decline in ALR, intense competition for deposits (albeit subsided slightly) coupled with significantly higher LD ratio will continue to exert pressure on margin.

• 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 - 1 Sep 2015