Latest Trends

• Loan growth in Aug-16 decelerated for the 12th consecutive month to 4.2% yoy (the lowest growth since Jun-03), on lower growth at the business segment (1.9% yoy vs. 3.7% yoy in Jul-16).

• Leading indicators were mixed, with applications continued easing for the 2nd straight month albeit at a smaller magnitude) while approval inched up marginally.

• Deposits grew for the 2nd straight month (albeit at a slower rate of 0.8% vs. 1% in previous month, to RM1.6trn). Despite higher deposits, LDR and LFR remained on an uptrend for the 3rd consecutive month to 89% and 83.7% (from 88.8% and 83.3% in previous month), as higher deposits were more than offset by relatively faster loan growth.

• Asset quality improved marginally on mom basis, with gross and net IL ratios declining by 2.6bps and 1.8bps to 1.66% and 1.27% respectively, while LLC increased for the first time since Mar-16, to 89.6% (from 88.7% in previous month). The improved IL ratios were reflected mainly in the purchase of securities and working capital segments.

Our Take

• While liquidity is still ample to support economic growth, higher LD ratio could limit loan growth and pressure margin.

• We continue to hol d the view that the banking sector’s asset quality will hold up well, as loans to oil & gas sector account for less than 3% of the banking sector’s loan. While we remai n less concerned on the banki ng sector’s asset quality, we note that share price performance of banks may continue to come under pressure in the near term

• Maintain loan growth projection of 7.5% for now. Our loan growth assumption is arrived based on 1.8x of projected 2016 GDP growth (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: RM8.51) and RHB Bank (BUY; TP: RM5.35).

Source: Hong Leong Investment Bank Research - 4 Oct 2016