Latest Trends

• Loan growth moderated to +4.6% YoY (+5.2% YoY in Sep-17) derailed by a dip in business loan growth (caused by repayments), whilst HH loan remained steady.

• Loan applications soared by +12.8% YoY vs. +0.3% YoY in Sep-17, driven by both HH and business loans.

• Loan approvals declined further by -2.1% YoY vs. -1.7% in Sep-17, caused by weak business loan approvals whilst HH loan approval growth was back on positive territory.

• System deposit growth is on the mend, rising steadily by +4.7% YoY, chiefly from higher growth in CASA.

• Average lending rate (ALR) rose 21bps to 4.64% while interest spread (ALR minus 3-month interbank rate) improved to 1.36% due to lower in 3-month interbank.

• Absolute NPL declined by -0.1% MoM, contributed by both business and HH loans by -1.2% MoM and -0.7% MoM respectively.

Our Take

• We maintain our 2017 loan growth forecast at 6.0% YoY. We continue to expect a revival in business segment that will capitalize on the development spending as well as recovery in the SME segment.

• We expect banks to post earnings recovery into 2018, 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 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 RHB (BUY; TP: RM5.60).

Source: Hong Leong Investment Bank Research - 4 Dec 2017