Latest Trends

• Loan growth decelerated to 5.3%YoY in Feb17 due to shorter working day thus halted the 5 straight months of improvement. The moderation in Feb loan growth was caused by slower HH loan to +5.1% whilst business loan was unchanged at 5.4%. Despite the moderation, we remain positive on further loan growth recovery in 2017.

• Both loan applications and approvals surged in Feb17 after several months of mixed performance. Several positive signs emerged since the past months continued in Feb17.

• Deposit growth decelerated to +2.2% YoY due to lower fixed deposit by -1.0% YoY. CASA’s contribution, however, rose to 27.1% of total deposits.

• Average lending rate (ALR) rose by 7bps to 4.61% while interest spread (ALR minus 3-month interbank rate) grew by 5bps to 1.17% in Feb.

• Absolute NPL declined by 7.2% YoY but was higher in absolute amount, leading to higher gross impaired loan of 1.63%.

Our Take

• We maintain our 2017 loan growth forecast at 6.0% YoY, supported mainly 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 eventually help to increase system liquidity.

Risks

• Deteriorating asset quality that will impact banks provisioning level and high household debt that will push consumer sentiments lower.

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: RM9.45), and BIMB (BUY; TP: RM4.86).

Source: Hong Leong Investment Bank Research - 3 Apr 2017