Latest Trends

• Loan growth picked up to +5.7% YoY supported by faster pace of business loan (+6.5% YoY) whilst HH loan was held broadly steady at +5.0% YoY.

• Loan applications slid by -15.3% YoY, derailed by business segment (-15.3% YoY), whilst HH segment fell for the first time in five months by -1.8%YoY.

• Loan approvals retreated by -2.3% YoY underpinned by slower business segment (-25% YoY).

• Total deposit growth eased marginally to +3.0% YoY (May: +3.4% YoY) due to across-the-board weakness. CASA composition for Jun advanced to 27.1% vs 26.7% in May-17.

• Average lending rate (ALR) contracted 14bps to 4.47% while interest spread (ALR minus 3-month interbank rate) also declined by 1.10% from 1.18%.

• GIL for the banking remained solid at 1.64%. Absolute NPL advanced by +5.2% YoY, however it eased by -0.9% MoM led by business segment

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: RM9.90) and BIMB (BUY; TP: RM4.86).

Source: Hong Leong Investment Bank Research - 1 Aug 2017