Latest Trends

• Loan growth in Jun-16 decelerated for the 9th consecutive month to 5.6% yoy as both business and household segments registered slower growth of 4.2% and 6% yoy respectively.

• Leading indicators were mixed, with loan applications in Jun- 16 continued to grow (albeit at a slower pace), while loan approvals on the other hand, resumed on a down trend, declining by 21% yoy to RM30.4bn in Jun-16.

• Deposits declined for the fourth consecutive month, by 0.5% yoy to RM1.47bn. Positive loan growth (albeit slower pace), coupled with declining deposits, have resulted in LDR and LFR increasing by 0.2%-pts and 0.3%-pts to 87.8%. Excess liquidity narrowed to RM209.9bn (from RM212.9bn in May- 16).

• Average lending rate (ALR) increased by 6bps to 4.61% (from 4.55% in May-16), while interest spread (ALR minus 3- month interbank rate) increased by 4bps to 0.96% (from 0.92% in May-16) mainly on the back of higher ALR.

• Gross and net IL deteriorated marginally by 1-2bps mom to 1.66% and 1.27% respectively, while LLC declined further to 89.5% (from 91.2% in May-16).

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% for now. Our loan growth assumption is arrived based on 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 Aug 2016