Latest Trends

• Loan growth in May-16 decelerated for the 9th consecutive month to 6.2% yoy, reflected by slower growth in most segments including transport vehicles, purchase of residential properties, personal use, working capital, coupled with a decline in the purchase of securities segment.

• Leading indicators resumed on upt rend on yoy basis, with both loan applications and approvals increasing by 8.9% and 2.2% respectively.

• Deposits continued to decline on yoy basis. On mom basis, deposits increased for the fi rst time since Feb-16, by 0.7% mom. As a result of deposit growth recovery, LDR and LFR declined by 0.1%-pt and 0.2%-pt to 87.6% and 82.3%.

• ALR declined to 4.55% (from 4.6% in Apr -16), resulting in interest spread declining by 5bps to 0.92%. Nevertheless, 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 deteriorated marginally, with gross and net IL in May-16 increasing to 1.65% and 1.25% (from 1.6% and 1.21% in the previous month) and LLC declining to 91.2% (from 93.9% in previous month).

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) and RHB Bank (BUY; TP: RM5.35).

Source: Hong Leong Investment Bank Research - 1 Jul 2016