Latest Trends

• Loan grew by +4.2% in Jan-18 vs. +4.1% in Dec-17, supported by positive growth in the HH (+5.2% vs. +5.1% in December). Business loan was still strong despite easing marginally to +2.8% from +2.9% in Dec-17.

• Loan application advanced by 25.5% vs. -2.1% in Dec-17, backed by the growth in both business and household segment.

• Loan approvals surged by +26.9% vs +15.4% in Dec-17 emanated by the strong growth in both business and HH loan.

• System deposits growth accelerated higher than loan growth by +4.4% yoy vs. +4.1% yoy in Dec-17.

• Average lending rate (ALR) rose to 4.63% after 2 consecutive months being flat at 4.61% due to reprising impact of several loans.

• Absolute NPL rising marginally by +1.3% mom (from -3.7% mom% in Dec-17) driven from weakness in residential and non-residential loans. GIL increase to 1.54% vs. 1.53% in Dec-17.

Our Take

• We expect the sector’s earnings recovery tp sustain 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 ( ↔ )

• The slight upwards in loan growth will ensure loan growth target of 5%-5.5% is achievable due to positive lending indicators. 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: RM11.00) and RHB (BUY; TP: RM6.00).

Source: Hong Leong Investment Bank Research - 5 Mar 2018