Latest Trends

• Loan growth slowed to 6.4% yoy in Mar-16 from 7.4% in the previous month, as both business and household segments registered slower growth of 5.2% and 6.4% yoy respectively.

• Leading indicators were mixed, with loan applications continued to grow (albeit at a slower pace of 1.1% yoy vs. 6% in Feb-16), while the decline in loan approvals accelerated to 23.4% yoy (from -16.8% in Feb-16). Mirroring this trend, approval rate declined further to 38.5% in Mar-16 (from 44.1% in Feb-16), as approval rates for both business and household segments declined to 37.6% and 39.3% respectively.

• Deposits declined for the first time since Asian Financial Crisis by 0.9% (from a growth of 1.2% in Feb-16), resulting in LDR increasing marginally to 86.9% (from 86.8% in Feb-16). Excess liquidity narrowed to RM219.3bn (from RM220.6bn in Feb-16).

• ALR and spread were stable during the month. Asset quality, on the other hand, remained intact (with marginal improvement, both in terms of GIL ratio and LLC).

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.

• 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 - 3 May 2016