Latest Trends

• Loan growth picked up for 3 rd consecutive month, expanding 4.5% yoy vs. 4.2% yoy in Sep-16. HH loan growth continued to moderate to 5.4% yoy vs. 5.6% yoy in Sep, but the slack was more than offset by business segment, which grew 3.2% yoy vs. 2.3% yoy in Sep, also rosing for 3 rd consecutive month since Aug-16.

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

• Deposit growth recovered further to 1.9% yoy vs. 0.8% yoy in Sep. Across all types of deposits, only negotiable instruments turned weaker. Both LFR & LDR eased slightly to 83.3% and 88.8% respectively.

• Gross and net IL remained impressive at 1.65% and 1.24%, but absolute NPLs rose a marginal 0.6% mom and were up 6.4% YTD.

Our Take

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

• We lower our loan growth projection to 5.3% as we see further moderation in HH growth due to tightening measures to cap the high household debt.

• Loan growth will be supported mainly from business segment where we believe banks will accelerate the approvals and dirbursements to keep the pace of development project implementation.

• We introduce our loan growth forecast for 2017 at 5.0% yoy. Growth will be supported by business segment that will capitalize on the development spending as well as rising SME segment as a result of government initiatives to drive economy moving forward.

Risks

• Risk of recession and its impact on asset quality, portfolio losses (MTM and realized), as well as non-interest income growth.

Rating

NEUTRAL ( ↔ )

• We keep our NEUTRAL stance on Banking sector due to modest growth outlook for earnings, loan and deposit growth. The modest earnings growth will result in lower ROE and lower the expected return.

Top Picks

• Maybank (BUY: TP: RM8.51) and RHB Bank (BUY; TP: RM5.29)

Source: Hong Leong Investment Bank Research - 1 Dec 2016