Monetary Conditions

• Most monetary indicators continued to expand at favourable pace in October. Broad money supply (M3) rose (+5.1% yoy; Sep: +5.0% yoy) while narrow money supply (M1) grew at a slightly faster pace of +11.7% yoy (Sep: +11.1% yoy). Growth in loan applications accelerated to +12.8% yoy (Sep: +0.3% yoy), similar to loan disbursement which rebounded by +8.4% yoy (Sep: -2.5% yoy). Nevertheless, loan approvals continued to decline by -2.2% yoy (Sep: -1.7% yoy). BNM foreign reserves increased by +US$0.3bn to US$101.5bn in October (Sep:+ US$0.7bn; US$101.2bn).

Loan & Deposit Liquidity

• Household deposit growth up ticked to 3.8% yoy (Sep: +3.7% yoy) while foreign deposits continued to decline (- 9.0% yoy; Sep: -6.3% yoy). Meanwhile, business deposits continued to grow at a double digit pace (+11.2% yoy; Sep: +11.3% yoy).

• Household loan-deposit gap remained small in October. Deposits grew at a faster pace of +3.8% yoy (Sep: +3.7% yoy) while household credit also picked up by +5.1% yoy (Sep: +5.0% yoy).

• Outstanding total loan growth charted a slower pace of +4.6% yoy (Sep: +5.2% yoy), affected primarily by slower business loans growth (+4.0% yoy; Sep: +5.4% yoy) on the back of stronger growth in loan repayments. Corporate bond issuance maintained its robust momentum in October, with gross issuance at RM13.8bn (Sep: RM17.7bn). According to RAM, a large portion of the issuance was from the private sector, especially in infrastructure and utilities sector.

• Leading loan indicators for consumer sector improved in October. Loans applied for residential properties accelerated sharply by +18.9% yoy (Sep: 7.2% yoy), while loans applied for passenger car registered a smaller contraction (-5.3% yoy; Sep: -13.9% yoy). Likewise, loans approved for passenger car loans rebounded by +3.7% yoy (Sep: -15.9% yoy) and loans approved for residential properties grew strongly by +14.5% yoy (Sep: +2.8% yoy).

Liquidity

• Excess liquidity improved further to RM137.7bn (Sep: RM133.3bn). Other loan liquidity indicators, such as loan-to fund ratio and loan to deposit ratio also showed a better trend. This could be attributed to higher monthly growth in deposits.

• In the bond space, non-resident recorded an out flow of RM2.2bn (Sep: +RM10.1bn), partly due to the RM13.5bn MGS which matured during the month. Consequently, foreign holdings of MGS inched lower to 42.7% (Sep: 42.8%). Foreigners continued to sell Malaysian equities (- RM0.3bn; Sep: - RM0.8bn).

• We expect BNM to normalize the policy rate by 25bps as early as January 2018, on account of the entrenched economic growth which may be sustainable into 2018. The risk of prolonged period of negative real interest rate amid continued signs of property imbalances also weigh on BNM decision.

Source: Hong Leong Investment Bank Research - 4 Dec 2017