Monetary Conditions

• Monetary indicators improved in July. Growth in broad money supply (M3) and narrow money supply (M1) increased to +2.3% yoy and +2.0% yoy respectively (Jun: +1.9% yoy; +0.9% yoy). However, loan disbursements declined by a larger magnitude at -11.0% yoy (Jun: -8.8% yoy). BNM foreign reserves rose marginally by US$0.1bn (Jun: +US$0.1bn) to US$97.3bn.

• The improvement in monetary conditions indicates modest growth momentum in the third quarter. We expect GDP growth to gradually improve in 2H 2016 and maintain our full-year GDP forecast at 4.2%.

Loan & Deposit

• Household loan-deposit growth gap remained stable, as deposit growth increased to +4.5% yoy (Jun: +4.4% yoy) amid marginal deceleration in household credit growth for the 16th consecutive month (+5.7% yoy; Jun: +6.0% yoy).

• Overall deposit growth rebounded to +1.0% yoy (Jun: -0.5% yoy), following a return in foreign deposits (+3.7% yoy; Jun: -1.2% yoy) amid continued decline in business deposits (-2.6% yoy; Jun: -0.8% yoy). As overall deposit growth rebounded, we opine that the liquidity condition does not point to an immediate need for a SRR cut.

• Loan indicators for the passenger car and housing sector showed further weakness. Loans applied for passenger cars recorded a double-digit decline of -23.8% yoy (Jun: -0.8 yoy). Loans applied for residential properties diminished at a faster pace of -11.8% yoy (Jun: -7.1% yoy). Meanwhile, loans approved for residential properties declined at a steady pace of -of -21.5% yoy (Jun: -21.6% yoy). Loans approved for passenger cars fell at a faster pace (-25.1% yoy; MayJun: -8.1% yoy).

• Growth in business loans moderated for the eleventh month to +3.7% yoy (Jun: +4.2% yoy). However, net PDS issuance rose to RM8.4bn (Jun: 4.7bn), recording the highest bond issuance in 2016, in tandem with higher awards of construction projects.

• We expect BNM to leave the OPR at 3.00% in 2016 on expectations of stronger 2H 2016 GDP growth. However, should growth fall below expectations, BNM may be inclined to ease monetary policy further to support growth.

• Excess liquidity in the banking system eased slightly to RM144.1bn as at end-Jul (Jun: RM147.3bn) after recording a bottom of RM121.9bn in Aug-15. Overall deposit-loan gap declined to RM187.1bn (Jun: RM209.9bn) as businesses and households reduced deposits on a monthly basis.

• Foreigners returned to increase their position in Malaysian equities, albeit by a modest amount of RM1.0bn in Jul (Jun: -RM1.8bn) following expectations of a highly accommodative monetary policy environment post-Brexit.

• Foreign holdings of Malaysian government debt securities also rose by RM5.9bn in July to RM213.1bn (Jun: +6.8bn). Consequently, foreign holdings of MGS increased to a record high of 51.9% (Jun: 49.8%).

Source: Hong Leong Investment Bank Research - 1 Sep 2016