Latest Trends

• Loan growth accelerated for 4 th consecutive month, surging 5.3% YoY vs. 4.5% YoY in Oct, pointing to the strong 2016 end.

• Leading indicators still posted mixed signal as the positive pick-up in loan growth was negated by subdued applications and approvals.

• Loan application reversed two months of decline by rising at +6% YoY in Nov, anchored by HH segment (+6.3% YoY) whilst business segment application remained weak for five consecutive months at -6.9% YoY.

• Banking system deposit growth remained lacklustre, but staged a recovery for the second month at 1.4% YoY and 0.1% MoM. Across all types of deposits, only foreign currency deposits and negotiable instruments turned weaker whilst CASA and fixed deposits remained strong.

• Absolute NPLs improved a marginal 0.3% mom and led to gross impaired loan hitting 1.63%, supported by improvement in purchase of securities and transport vehicles.

Our Take

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

• We maintain our loan growth forecast in 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.

• We believe banks will accelerate the approvals and disbursements of the business segment to keep the pace of development project implementation.

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

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

Source: Hong Leong Investment Bank Research - 3 Jan 2017