Latest Trends

• 2017 loan growth ended at +4.1%YoY (+3.9% in Nov) supported by marginal improvement in business loan (+2.9% yoy in Dec vs. +2.3% in Nov) while HH loans growth stayed steady at 5.1% in Dec-17.

• Loan application declined by -2.1% yoy in Dec-17 vs. +15.8% YoY in Nov-17 due to declines in business loans (- 12.5% YoY in Dec-17 vs +19.5% in Nov-17)

• Loan approvals moderated to +15.4% yoy in Dec-17 vs. +22.3% yoy in Nov-17. Growth was dampened by slower growth in business loans (+17.8% yoy in Dec vs. +31.2% in

• System deposit growth moderated marginally to +4.1% YoY to RM1.76trn, however we deem that the growth to be satisfactory.

• Average lending rate (ALR) unchanged at 4.61% while interest spread (ALR minus 3-month interbank rate) softened to 1.16% due to higher in 3-month interbank rate.

• Absolute NPL declined by -3.5% MoM, contributed by both business and HH loans, GIL touched all time low at 1.53%.

Our Take

• 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 further stability in banks asset quality in 2018, however we view that certain segments may pose a risk to the potential stablility of asset quality.

• We expect banks’ loan loss coverage (LLC) to improve given the slower trend of large provision.

• Liquidity is in the mend since BNM implemented forex measures that cap further liquidity outflow.

Risks

• The downside risks to our call are (1) significant deterioration in asset quality; (2) further weakening of loan growth; and (3) severe NIM compression.

Rating

OVERWEIGHT ( ↔ )

• 2017 loan growth end with a dismal, however we view that Banking sector is poised to record a better year in 2018 due to (1) improving ROE (led from recovery of earnings); (2) improving NOII income; (3) stable asset quality; and (4) Less severe of MFRS9 impact.

Top Picks

• Maybank (BUY, TP: RM10.70) and RHB (BUY; TP: RM5.60).

Source: Hong Leong Investment Bank Research - 2 Feb 2018