Latest Trends

• Loan growth moderated to +5.2% YoY (Aug: +5.8% YoY) derailed by a dip in business loan growth, whilst HH loan was unchanged for 4 consecutive months at +5.0%.

• Loan applications slowed down to +0.3% YoY vs. +4.1% YoY in Aug-17, weighed by both business (-3.0% YoY; Aug: -2.8% YoY) and HH loans (+3.1% YoY; Aug: +9.8% YoY).

• Loan approvals eased to -1.7% YoY vs. +9.9% YoY in Aug-17, also dragged by both business (-1.0% YoY; Aug: +10.1% YoY) and HH loans (-2.3% YoY; Aug: +9.7% YoY).

• Total deposit growth softened +4.6% YoY (Aug: +5.0% YoY) on slower growth of CASA, fixed deposits and other deposits.

• Average lending rate (ALR) widened marginally by 1bps to 4.62% while interest spread (ALR minus 3-month interbank rate) slid to 1.28% due to a higher in 3-month interbank to 3.34%.

• GIL was unchanged at 1.67% contributed by HH segment (+0.3% MoM). Loan-loss coverage dropped marginally to 81.2% from 81.4% in Aug-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 remain 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 - 1 Nov 2017