Monetary Conditions

• Monetary indicators improved in August after posting poor readings in July. Both M3 and M1 growth rebounded to 4.6% yoy and 8.8% yoy respectively (Jul: +3.8% yoy and +4.6% yoy). However, loan disbursement contracted for the first time in five months by 2.4% yoy in Aug (Jul: +2.4% yoy) while BNM reserves continued to tumble by US$2.0bn to US$94.7bn as at end-Aug (Jul: -US$8.8bn to US$96.7bn).
• Although monetary conditions showed an improvement in August, they are not strong enough to justify a higher 3Q GDP growth given gloomier global outlook, lingering GST impact and falling confidence. We maintain our view that GDP growth would ease in 3Q15 (estimate +4.8%; 2Q15: +4.9%) before inching up to 5.0% in 4Q15. 2015 full -year GDP growth is maintained at 5.0%.

Loan & Deposit

• Household loan-deposit growth gap narrowed in August, further confi rming abated financial imbalances. Household loan growth dipped to a 7½-year low of 8.3% yoy (Jul: +8.6% yoy) while household deposit growth held steady at 6.6% yoy. We still believe that household loan-deposit growth gap would remain in a narrow zone in the near term given the ongoing prudent lending guidelines, attractive deposit campaigns and prolonged policy rate pause.
• Housing sector outlook remained subdued as affi rmed by the latest forward housing loan indicators amid prevailing negativities (macro prudential measures & weak consumer sentiment). Mortgage loan applications dropped by a steeper pace of 6.4% yoy in Aug (Jul: -3.3% yoy) while loan approvals for the segment fell 17.5% yoy (Jul: -17.8% yoy).
• Conversely, business credit growth shot up to 11.5% yoy (Jul: +9.9% yoy), with bulk of the funds mainly channeled into real estate, wholesales & retail trade, and finance & insurance sectors. Net PDS issuance hit 8-month high of RM4.2bn (Jul: +RM471m). Despite this encouraging trend, we opine that business loan outlook remains challenging due to MYR weakness and dimmer global environment.
• With financial imbalances risk remained contained, domestic growth and i nflation outlook staying within B NM’s target zone amid looming external uncertainties, we expect BNM to prolong its OPR pause at 3.25% beyond 2015. We do not see the need for a rate cut at this juncture as it will send wrong signal about growth prospects and dent ringgit sentiment further.

Liquidity

• With foreign capital continuing to flow out from Malaysia, excess liquidity fell further to RM121.9bn as at end-Aug (Jul: RM124.9bn). Similarly, the overall deposit -loan gap tapered for the fifth month to RM233.1bn (Jul: RM247.4bn). That said, the smaller excess liquidity in the banking system is yet to dent financial intermediation and credit activities.
• On Mal aysia’s equity market, foreign investors stepped up their net sell-off to RM4.0bn in Aug (Jul: -RM3.0bn), resulting in a cumulative outflows of RM15.8bn this year. Their reduction in Malaysian debt securities also widened to RM8.9bn (Jul: -RM5.2bn), particularly seen in MGS (-RM8.0bn; Jul: -RM1.4bn) and BNM monetary note (-RM2.2bn; Jul: -RM2.0bn).

Source: Hong Leong Investment Bank Research - 1 Oct 2015