Latest Trends

• Loan growth in Apr-16 decelerated for the 8th consecutive month to 6.3% yoy, and this was reflected by slower growth in most segments including transport vehicles, properties, personal use, construction, and working capital segments.

• Leading indicators were lower on yoy basis, with loan applications and approvals declining by 6% and 17.2% respectively. Approval rate increased to 42.1% (from 38.5% in Mar-16) mainly on higher approval rate at the business segment (45.8% vs. 37.6% in Mar-16).

• Deposits declined for the second straight month, by 1.1% yoy to RM1.45bn. Slower loan growth, coupled with a decline in deposits have resulted in LDR increasing by 0.3%-pts mom to 87.2% and excess liquidity narrowing to RM211.7bn (from RM219.3bn in Mar-16). Nevertheless, LFR remained broadly stable at 82.5% (Mar-16: 82.4%)

• ALR and spread were stable during the month. We expect ALR to trend higher in the coming months, as several banks have recently raised their lending rates, and we believe more banks will follow suit, either via higher base rates or higher spread.
   
• Asset quality remained intact, with GIL remained stable at 1.6%, while LLC declined by 0.4%-pts to 93.9%. Our Take
• While liquidity is still ample to support economic growth, higher LD ratio could limit loan growth and pressure margin.

• Higher lending rates, coupled with more disciplined deposit competition will result in stabilization in NIM compression.

• 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 defaults and portfolio losses from foreign outflow.

Top Picks

• Maybank (BUY: TP: RM9.33). While we like RHB Cap, we note that RHB Cap shares have already been suspended to facilitate the distribution and capital repayment.

Source: Hong Leong Investment Bank Research - 1 Jun 2016