Latest  Trends

• Loan growth slowed further to 7.4% yoy (from 7.7% in Jan 16). Growth at the business segment slowed to 7.1% (from 7.3% in Jan 16), while growth at the household segment moderated to 7% (from 7.6% in Jan 16).

• Leading indicators were mixed, with loan applications continued to grow (albeit at a slower pace of 6% yoy vs. 9.3% in Jan 16), while the decline in loan approvals accelerated to 16.8% yoy (from 14% in Jan 16). Approval rate, on the other hand, increased to 44.1% in Feb 16 (from 41% in Jan 16), as approval rates for both business and household segments increased to 43.9% and 44.2% respectively.

• Deposit grew by 1.2% yoy (and 0.7% mom) in Feb 16, resulting in LDR and net LDR declining to 86.8% and 85.5% (from 87.3% and 85.9% in Jan 16). Excess liquidity widened to RM220.6bn in Feb 16 (from RM211.2bn in Jan 16).

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

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 16.5bps above its all-time-low of 4.44%), intense competition for deposits and high 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

• Positives – 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 Apr 2016