Latest Trends

• Loan growth inched higher to +5.8%YoY in Aug-17 (Jul: +5.6% YoY), supported by business loan expansion (+6.8%; Jul: +6.3% YoY) whilst HH loan was unchanged at +5.0% YoY.

• Loan application growth decelerated to +4.1% YoY (Jul: +22.9% YoY) hampered by both business (+10.1% YoY; Jul: +24.8% YoY) and HH loan (+9.7%YoY; Jul: +26.4% YoY).

• Loan approvals grew at a slower pace (+9.9% YoY; Jul: +24.8% YoY), attributed to both business (+10.1% YoY) and HH loan (+9.7% YoY).

• Total deposit growth recovered to +5.0% YoY (Jul: +4.3% YoY) chiefly emanated from a spike in CASA (+9.5% YoY) which offset the weakness in fixed deposits (-1.0% YoY).

• Average lending rate (ALR) was unchanged at 4.61% while interest spread (ALR minus 3-month interbank rate) upticked to 1.29% due to a dip in 3-month interbank to 3.32%.

• GIL improved to 1.67% lifted by business segment (-0.7% MoM) whilst HH was unchanged. Loan-loss coverage grew marginally to 81.4% from 81.3% Jul-17.

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 cap further leverage by consumers.

Rating

NEUTRAL ( ↔ )

• We stay NEUTRAL on the sector due to the uncertainty of MFRS9 implementation on bank earnings. Various liquidity measures are also expected to put more pressure to bank net interest margin. We expect share price movements to be more muted into the remainder of the year as we see limited re rating catalyst for the banking sector.

Top Picks

• Maybank (BUY, TP: RM10.70) and BIMB (BUY; TP: RM5.00).

Source: Hong Leong Investment Bank Research - 2 Oct 2017