Latest Trends

• Loan growth halted its 12th consecutive month of deceleration trend, rising by 4.2% yoy on the back of recovery in business segment (2.3% yoy vs. 1.9% yoy in Aug-16).

• Despite the positive sign in loan growth, leading indicators continued to disappoint, with applications continued easing for the 3rd straight months at faster pace while approvals tumbled.

• Deposit growth stabilized at 0.8% yoy, the third consecutive month of positive expansion (Aug: +0.8% yoy; Jul: +1.0% yoy). Both LFR & LDR eased slightly to 83.4% and 88.7% respectively (Aug: 83.7% & 88.7% respectively).

• Asset quality remained impressive with gross and net IL improving by 1.1bps and 1.6bps to 1.65% and 1.26% evidenced by improvement in purchase of securities, purchase of transport vehicle and working capital segments. LLC declined slightly to 89.4% (vs. 89.6% in Aug) on the back of lower general provision.

Our Take

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

• We continue to hold 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 remain less concerned on the banking sector’s asset quality, we note that share price performance of banks may continue to come under pressure in the near term.

• A sustained recovery in GDP growth is needed to confirm the end of deceleration in loan growth. While GDP growth is slated to grow at 4-5% in 2017, high household debt may continue to limit upside to loan growth in 2017 (2016f: 7.5%).

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 - 1 Nov 2016