Monetary Conditions

• Monetary indicators continued to expand at a faster pace in October. Broad money supply (M3) and narrow money supply (M1) growth strengthened to +3.2% yoy and +2.7% yoy respectively (Sep: +2.2% yoy; +0.1% yoy). Loan disbursements declined by a smaller pace of -2.0% yoy (Sep: -6.5% yoy). BNM foreign reserves rose marginally by US$0.1bn to US$97.8bn (Sep: +US$0.2bn).

• The overall improvement in monetary conditions in October indicates slight pick-up in growth momentum in early 4Q.

• Household loan loan-deposit growth gap remained stable, as deposit growth increased by +4.7% yoy (Sep: +4.6% yoy) while households credit eased slightly to 5.4% yoy (Sep: +5.6% yoy).

Loan & Deposit Liquidity

• Overall deposit growth grew at a faster pace of +1.9% yoy (Sep: +0.8% yoy), following larger increase in foreign deposits (+8.3% yoy; Sep: +5.8% yoy) and household deposit (+4.7%; Sept: +4.6% yoy).

• Loan indicators for the passenger car and housing sector remained lackluster. Loans applied for passenger cars declined by larger amount -11.8% yoy (Sep: -8.9% yoy) while residential loan applications contracted by -0.1% yoy (Sep: +2.2% yoy). Meanwhile, loans approved for passenger cars deteriorated by -18.5% yoy (Sep: -9.9% yoy) while residential properties declined at a faster pace of -9.3% yoy (Sep: -6.3% yoy).

• Growth in business loans accelerated for the second consecutive month to +2.9% yoy (Sep: +2.0% yoy) with year-on-year expansion in the construction; finance, insurance and business sectors. However, net PDS issuance moderated to RM3.9bn, (Sep: +4.7bn).

• Excess liquidity in the banking system contracted marginally to RM142.9bn as at end-October (end-Sep: RM146.2bn). At the same time, overall deposit-loan gap declined slightly to RM187.7bn (Sep: RM191.2bn) as the gains in deposits was less than the increase in loans. On deposits, businesses increased their deposit holdings for second consecutive month while foreigners raised their deposits for third consecutive month.

• Foreign holdings of Malaysian government debt securities increased by RM6.6bn in October to RM218.4bn. Consequently, foreign holdings of MGS touched a record high of 51.9% (Sep: 51.3%).

• Nonetheless, foreigners reduced their position in Malaysian equities, by a modest amount of RM0.4bn in October (Sep: - RM0.3bn).

• However, following Donald Trump’s victory in US Presidential election, foreigners pulled out significant amount of funds from the Malaysian asset markets. Hence, despite an expected recovery in GDP growth in 2017, further capital outflows from Malaysian financial system could possibly lead to BNM reducing the SRR (i.e. by - 50bps) in the next MPC meeting (19 th January) to inject liquidity in this volatile environment.

Source: Hong Leong Investment Bank Research - 1 Dec 2016