Latest Trends

• Loan growth rebounded to +6.0% yoy in Mar17 after a deceleration in Feb17. Higher loan growth was supported by growth in the business segment, whilst HH loan improved after a slight moderation in Feb17.

• Loan approvals grew strongly whilst loan applications decelerated. Positive signs that emerged in recent months have translated into strong approvals growth in Mar17.

• Deposits accelerated to 3.3%YoY. Composition of CASA declined by 50bps to 26.6% (-5bps MoM) while fixed deposits composition rose by 10bps to 32.1%.

• Average lending rate (ALR) moderated by 10bps to 4.60% while interest spread (ALR minus 3-month interbank rate) uptick to 1.28% due to lower 3-month interbank rate in Mar17.

• Gross impaired ratio was unchanged at 1.63% for 2 consecutive months despite the rise in absolute NPL due to weakness in the construction sector.

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 - 2 May 2017