Latest  Trends

• Loans growth faster at 10.2% yoy vs. 9.6% underpinned by business acceleration which more than offset slightly slower household expansion.

• Leading Indicators (LI) mixed mom, applications higher (business) but approvals lower (business and household). Yoy growth also slower (application) and contracted (approval). Approvals rate fell below 50% and to lowest level.

• Deposits reversed to grow mom with higher growth of 5.1% yoy vs. 4.5% but LD ratio higher, resulting in lower excess liquidity (LD gap) of RM233bn.

• Average lending rate (ALR) and spread lower.

• Asset quality improved but capital ratios lower on securities revaluation and dividend payout.

Our Take

• Keep 2015 loans growth projection at 8% despite stronger YTD growth given higher base, slower applications growth, lower approvals, record low approval rate and higher LD ratio. Expectations of stronger business segment mitigating household slowdown materialized but challenges from internal and external headwinds as well as weaker leading indicators.

• While liquidity still ample to fund domestic economic growth, higher LD ratio could limit loans growth and pressure margin. Despite higher LD ratio, still lower than levels prior to 2004.

• Decline in ALR to only 5bps above all-time low, intense competition for deposits and higher LD ratio will continue to exert pressure on margin.

• Solid asset quality and capital ratios intact to support growth and capital management, especially with dividend reinvestment plan.

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; and capital management.

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 Oct 2015