Monetary Conditions

• Monetary indicators continued to expand at tepid pace in August. Growth of broad money supply (M3) and narrow money supply (M1) remained moderate at +2.4% yoy and +1.0% yoy respectively (Jul: +2.3% yoy; +2.0% yoy). Loan disbursements declined by a smaller magnitude at -6.0% yoy (Jul: -11.0% yoy). BNM foreign reserves rose marginally by US$0.2bn (Jul: +US$0.1bn) to US$97.5bn.

• The slow growth in monetary conditions in Jul-Aug indicates modest momentum in 3Q16. We expect growth to pick up marginally in 2H 2016 and maintain our GDP forecast at 4.3% (1H16: +4.1%).

Loan & Deposit

• Household loan-deposit growth gap remained stable, as deposit growth increased to +4.7% yoy (Jul: +4.5% yoy) while households credit remained steady (+5.7% yoy), after moderating for 16 consecutive months.

• Overall deposit growth grew by +0.8% yoy (Jul: +1.0% yoy), as increase in household deposit (+4.7%; Jul: +4.5% yoy) was more than offset by a decline in business deposit (-3.7% yoy; Jul: -2.6% yoy).

• Loan indicators for the passenger car and housing sector showed improvement after deteriorating in the previous month. Loans applied for passenger cars rose further by +7.1% yoy (Jul: +5.5% yoy) while residential loan applications increased by 20.6% yoy (Jul: +16.5% yoy). Meanwhile, loans approved for passenger cars rebounded to +1.3% yoy (Jul: -25.1% yoy) while residential properties declined at a slower pace of -3.0% yoy (Jul: -21.5% yoy). Loans approved for passenger cars rebounded for the fi rst time after contracting for eight consecutive months (+1.3%; Jul: -25.1% yoy).

• Growth in business loans moderated for the twel fth month to +1.9% yoy (Jul: +3.7% yoy) while net PDS issuance remained stable at RM7.6bn (Jul: 8.5bn), in tandem with continued issuance of working capital mainly for infrastructure projects.

• We expect BNM to leave the OPR unchanged in the Nov MPC meeting on expectations of slight pick-up 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 dipped slightly to RM135.0bn as at end-Aug (Jul: RM144.1bnbn) after recording a bottom of RM121.9bn in Aug-15. Overall deposit-loan gap also declined to RM182.5bn (Jul: RM187.1bn) as businesses and foreigners reduced deposits on a monthly basis.

• Foreign inflows increased thei r position in Malaysian equities, albeit by a modest amount of RM1.7bn in August (Jul: +RM1.0bn).

• Foreign holdings of Malaysian government debt securities also rose by RM4.5bn in August to RM217.6bn (Jul: +5.8bn). Consequently, foreign holdings of MGS remained close to record high of 51.5% (Jul: 51.9%).

Source: Hong Leong Investment Bank Research - 4 Oct 2016