Monetary Conditions

• Monetary indicators continued to expand in December. Broad money supply (M3) expanded at a slightly faster pace (+3.0% yoy; Nov: +2.9% yoy) while narrow money supply (M1) growth strengthened (+5.7% yoy; Nov: +4.5% yoy). This was partly due to lower base effect in December 2015. However, leading indicators for loans deteriorated, with both applications and approvals declining at a faster pace. BNM reserves declined by US$1.8bn to US$94.6bn (Nov: -US$1.4bn).

• The overall improvement in monetary conditions indicates modest momentum in 4Q16. We retain our GDP growth estimate at 4.2% (3Q 2016: 4.3%).

Loan & Deposit

• Household loan-deposit growth gap narrowed slightly, as deposit growth moderated to +5.1% yoy (Nov: +5.4% yoy) while households credit expansion also registered a slightly slower pace of +5.3% yoy (Nov: +5.4% yoy).

• Overall deposit growth picked up slightly to +1.5% yoy (Nov: +1.4% yoy) following lesser drag in business deposits (-2.3% yoy; Nov: -3.8% yoy) amid continued expansion in household deposit (+5.1%; Nov: +5.4% yoy).

• Loan indicators for consumer sector deteriorated in December. Loans applied for residential properties declined by -2.7% yoy after growing in the previous month (+11.5% yoy). Likewise, loans approved for residential properties deteriorated by -13.5% yoy (Nov: +0.2% yoy). However, loans applied for passenger cars continued to decline by a smaller magnitude of -1.1% yoy (Nov: -3.4% yoy) while passenger car loan approvals remained weak (-11.8% yoy; Nov: -11.8% yoy).

• Growth in business loans accelerated for the fourth consecutive month (+5.0% yoy; Nov: +4.6% yoy) with year on-year expansion in the wholesale and retail trade; restaurant and hotels; transport sectors. However, net PDS issuance moderated to RM4.2bn (Nov: RM6.8bn).

Liquidity

• Excess liquidity in the banking system was lower at RM137.8bn as at end-Dec (Nov: RM142.2bn). Overall deposit-loan gap also declined slightly to RM173.9bn (Nov: 174.6bn) as deposit growth was slower than loan growth.

• Foreign holdings of Malaysian government debt securities continued to decline, albeit by a smaller pace of -RM6.7bn (Nov: -RM19.9bn). Consequently, foreign holdings of MGS fell to 47.1%, returning to December 2015 level (47.3%).

• Foreigners also reduced their position in Malaysian equities, by RM1.0bn in December (Nov: -RM3.9bn). Malaysia has experienced three consecutive years of outflows in the equity market (2016: RM-2.8bn; 2015: -19.5bn; 2014: -6.9bn).

• We expect BNM to stay pat on the OPR given firmer growth and rising inflation outlook. We opine that BNM may deploy a cut in SRR in the event of any global financial turmoil triggered by adverse external development (i.e. Trump’s growth and anti-trade measures, European politics)

Source: Hong Leong Investment Bank Research - 2 Feb 2017