Latest  Trends

• Loan growth in Jan 16 slowed further to 7.7% yoy. Growth at the business segment slowed to 7.3%, while growth at the household segment moderated marginally to 7.6%.

• Leading indicators were mixed, with loan applications accelerated to 9.3% yoy, while the loan approvals declined by 14%. The approval rate declined to 41% in Jan 16 from 53% in Dec 15, as approval rates at both the business and household segments declined to 41.5% (from 59.9% in Dec 15) and 40.5% (from 46.9% in Dec 15) respectively.

• Deposit growth continued to lag behind loan growth, resulting in LDR and net LDR increasing further to 87.3% and 85.9%. Excess liquidity narrowed to RM211.2bn. While liquidity is still ample to fund domestic economic growth, high LD ratio could limit loan growth albeit still supportive of credit expansion.

• ALR and spread trended higher. Asset quality, on the other hand, remained intact (albeit having deteriorated both mom and yoy).

Our Take

• While liquidity is still ample to support economic growth, higher LD ratio could limit loan growth and pressure margin.

• Low ALR (which is just 12bps above its all-time-low), intense competition for deposits and higher LD ratio will continue to exert pressure on margin.

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

• Maintain loan growth projection of 7.5%, at 1.8x of projected 2016 GDP growth (slightly lower than its historical average of 2x).

Risks

• Risk of recession and its impact on asset quality, portfolio losses (MTM and realized), as well as non-interest income growth.

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. We have a trading buy call on CIMB.

Source: Hong Leong Investment Bank Research - 1 Mar 2016