Monetary Conditions

• Monetary indicators recorded further improvement in May. Growth in broad money supply (M3) picked up to 2.2% (Apr: +1.4%), while that of narrow money supply (M1) rebounded to 1.2% (Apr: -0.9%). Loan disbursements recovered to expand by 6.9% yoy (Apr: -1.8% yoy). BNM foreign reserves rose marginally by US$0.3bn (Apr: no change) to US$97.3bn.

• The improvement in monetary conditions affirmed our expectation that growth will improve gradually in 2H 2016. We maintain our 2016 GDP growth forecast at 4.2%.

Loan & Deposit

• Household loan-deposit growth gap remained stable, as deposit growth moderated to 4.7% yoy amid marginal deceleration in household credit growth for the fourteenth consecutive month (+6.2% yoy; Apr: +6.3% yoy).

• Overall deposit growth declined, albeit at a slower pace of -0.4% yoy (Apr: -1.3% yoy), following a marginal improvement in business deposits (+0.6% yoy; Apr: -3.1% yoy). However, deposits among financial institutions continued to record a negative growth (-13.1%; Apr: -9.2% yoy). Despite this development, we opine that liquidity condition has not reached a stressful level to trigger further need for SRR cut.

• Loan indicators for the passenger cars and housing sector showed an improvement. Loans applied for passenger cars recorded a marginal growth of +0.5% yoy after four consecutive months of contraction. Loans applied for residential properties also reverted to a growth of +7.1% yoy (Apr: -3.1% yoy). At the same time, loans approved for passenger cars and housing declined at a slower pace in May (-14.0% yoy and -11.2% yoy respectively; Apr: -21.8% and -25.7% respectively).

• While growth in business loans moderated for the ninth month to 4.5% yoy (Apr: +5.0% yoy), the level of loans disbursed increased during the month. Net PDS issuance rose two-fold to RM3.5bn (Apr: RM1.5bn) in tandem with higher awards of construction projects.

• We still expect BNM to extend its OPR pause at 3.25% in 2016. Rate cut is not imminent as we believe BNM will likely wait for income measures and infra projects to support economic growth.

• Excess liquidity in the banking system improved slightly to RM146.8bn as at end-May (Apr: RM145.8bn) after improving from a bottom of RM121.9bn in Aug-15. Overall deposit-loan gap was steady at RM193.3bn (Apr: RM193.7bn).

• Foreigners reduced their position in Malaysian equities by RM4.3bn in May after building position for three consecutive months (RM7.1bn) following domestic and global concerns.

• Foreign holdings of Malaysian government debt securities also rose by a smaller magnitude of RM1.6bn in May to RM200.4bn (Apr: +7.5bn). Consequently, foreign holdings of MGS moderated to 48.7% (Apr: 49.1%).

Source: Hong Leong Investment Bank Research - 1 Jul 2016