Monetary Conditions

• Monetary indicators continued to expand in September. Broad money supply (M3) and narrow money supply (M1) growth moderated to +2.2% yoy and +0.1% yoy respectively (Aug: +2.4% yoy; +1.0% yoy) but grew on a mom basis. Loan disbursements declined by -6.5% yoy (Aug: -6.0% yoy). BNM foreign reserves rose marginally by US$0.2bn to US$97.7bn (Aug: +US$0.2bn).

• The mild improvement in monetary conditions in 3Q16 indicates modest momentum in the corresponding quarter. We maintain our 3Q16 GDP growth estimate at 4.2% (2Q16: +4.0%).

Loan & Deposit Liquidity

• Household loan-deposit growth gap remained stable, as deposit increased by +4.6% yoy (Aug: +4.7% yoy) while growth in households credit remained steady at 5.6% yoy (Aug: +5.7% yoy).

• Overall deposit growth was stable at +0.8% yoy (Aug: +0.8% yoy), following continued increase in foreign deposits (+5.8% yoy; Aug: +2.4% yoy) and household deposit (+4.6%; Aug: +4.7% yoy).

• Loan indicators for the passenger car and housing sector remained volatile and weakened after improving in the previous month. Loans applied for passenger cars declined by -8.9% yoy (Aug: +6.3% yoy) while residential loan applications moderated to +2.2% yoy (Aug: +12.7% yoy). Meanwhile, loans approved for passenger cars deteriorated by -9.9% yoy (Aug: +1.3% yoy) while residential properties declined at a faster pace of -6.3% yoy (Aug: -3.0% yoy).

• Growth in business loans increased slightly to +2.0% (Aug: +1.9% yoy) with larger volume of loans extended to real estate; agriculture; manufacturing; finance, insurance and business sectors. However, net PDS issuance moderated to RM4.7bn, (Aug: RM7.6bn), in tandem with continued issuance of working capital and infrastructure projects.

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

Liquidity

• Excess liquidity in the banking system rose slightly to RM146.2bn as at end-Sep (Aug: RM135.0bn). At the same time, overall deposit-loan gap rose slightly to RM191.2 bn (Aug: RM182.5bn) as foreigners, businesses and households increased deposits. Of significance, businesses increased deposit after three consecutive months of decline.

• Foreign inflows reduced their position in Malaysian equities, by a modest amount of RM0.3bn in September (Aug: +RM1.7bn) following hawkish comments from Fed officials in the annual Wyoming Jackson Hole conference.

• Foreign holdings of Malaysian government debt securities also declined by RM5.8bn in August to RM211.8bn, wiping the gains in August (+4.5bn). Consequently, foreign holdings of MGS moderated to 51.3% (Aug: 51.5%).

Source: Hong Leong Investment Bank Research - 1 Nov 2016