Latest Trends

• Overall industry loan growth ended 2016 at 5.3% YoY, with slippage seen in HH loan growth (+5.3% YoY; Nov: +5.4% YoY) but was offset by stronger business loan growth (+5.0% YoY; Nov: +4.6% in Nov).

• It’s a mixed bag for loan application and loan approval as both shown weak performance despite the stronger loan growth in 2016. All in, we are unpertubed with the less encouraging numbers in application and approval as December is traditionally a weak month as shown in data for the past 3 years.

• Banking system deposit growth concluded in a stable position, rising 1.5% YoY (the highest in 2016).

• Average lending rate (ALR) rose slightly by 1bps to 4.49% whiles interest spread (ALR minus 3-month interbank rate) fell by 2bps to 1.08% in Dec16

• Absolute NPLs improved a marginal 0.1% mom and led to gross impaired loan touching 1.61% (+2bps) supported by improvement in the business segment.

Our Take

• We introduce our new loan growth forecast in 2017 at 6.0% YoY. Growth will be supported by business segment that will capitalize on the development spending as well as recovery in the SME segment.

• We expect banks to post earnings recovery in 2017, on the back of 1) higher loan growth expectations 2) stable contribution from NOII 3) continued discipline on expenses, and 4) ending of impairment programme.

• We expect banks’ loan loss coverage (LLC) to improve in CY2017 given the slower trend of large provision.

• BNM measures to mandate conversion of export proceeds may help to increase system liquidity.

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: RM8.80), RHB Bank (BUY; TP: RM5.31) and Alliance Financial Group (BUY, TP: RM4.20)

Source: Hong Leong Investment Bank Research - 2 Feb 2017