System loan growth in Feb-18 continued on positive trend at 4.5% YoY (4.2% YoY in Jan-18) supported by both household (5.6% YoY vs. 5.2% YoY in Jan-18) and business segment (3.2% YoY vs. 2.8% YoY in Jan-18). Leading indicators were however unable to sustain positive momentum. Applications slid to -5.8% YoY (25.5% YoY in Jan-18) and approvals declined by -4.5% YoY (26.9% YoY in Jan-18). Deposits eased marginally to 4.2% YoY, positively CASA ratio momentum was sustained which constituted 27.7% of total deposits. Asset quality eased down marginally to 1.55% (-2bps MoM) due to HH segment. Capital remains intact with improvement in the Tier-1 and core capital. However CET1 was unchanged at 13.1%. We reiterate our 2018 loan growth target at 5%- 5.5%. Maintain OVERWEIGHT. Top picks: RHB (TP: RM6.00) and Maybank (TP: RM11.00).

Loan Growth

February’s system loan growth gathered further pace for the 3rd consecutive month at 4.5% YoY (4.2% YoY in Jan-18) supported by higher growth in both HH and business loan. HH loans accelerated faster by 5.6% YoY (5.2% YoY in Jan-18) underpinned by residential property (9% YoY), personal financing (+4.9% YoY) and securities (+3.3% YoY). Business loan gave glimmer of hope by rising 3.2% YoY (2.8% YoY in Jan-18), backed by construction (12.7% YoY), real estate (5% YoY) and wholesale & retail trade (3% YoY).

Loans – Leading Indicators

Both applications and approvals reversed the positive trend recorded from Nov-17 to Jan-18. Loan applications declined -5.8% YoY (+25.5% YoY in Jan-18) and loan approvals slid -4.5% YoY (26.9% in Jan-18). The severe decline in loan applications was derailed by both HH (-4.6% vs. 26.2% in Jan-18) and business segment (-7.2% YoY vs. 24.6% in Jan-18). Residential declined for the first time in 13 months whilst demand for personal use remained healthy. Loan approvals was hampered by business segment (-20.5% YoY vs. 32.8% in Jan-18), in contrast HH segment moderated to 10.6% YoY vs. 22.7% YoY in Jan-18. Residential property dipped to 1.2% YoY vs. 20.2% YoY in Jan-18 whilst demand for personal use remained strong at 24.3% YoY vs. 36.3% in Jan-18. Overall, approval rate improved slightly to 43.3% despite weakness in business approvals and it was mitigated by approvals in the HH segment.

Deposits & LD Ratio

Despite higher loan growth, system deposits growth eased slightly to 4.2% YoY to RM177.9tn (4.4% in Jan-18). CASA demand was strong at 6.7% YoY, but overall deposits was slower dragged by demand deposits and NIDs which slowed down to 8% YoY (12% in Jan-18) and -21% YoY (-19% YoY in Jan-18) respectively. CASA ratio stood healthily at 27.7%. System excess liquidity eased to RM182.9bn (RM184.5bn in Jan-18), whilst system loan-to-deposit ratio increased marginally to 89.7% vs 89.6% in Jan-18 due to higher loan growth outpacing deposits growth. Other liquidity indicators such as loan-to-fund ratio and loan-to-fund-equity showed improving trends.

Lending Rate

The 3-month deposit rate increased 4bps to 3.68% and the average lending rate for Feb-18 was up by 16bps to 4.79%. Interest rate spread was unchanged at 1.11% despite higher ALR and 3-month interbank. With CASA improving and average lending rates trending upwards, we still believe that NIMs compression will continue albeit lower as excess liquidity is still narrowing and stiff price-based competition for deposits continues to plague the market.

Asset Quality

Absolute NPL rose marginally by +1.7% MoM due mainly to weakness HH segment, chiefly from securities and personal use. Gross impaired ratio was stable at 1.55 (+2bps MoM). Meanwhile, loan loss coverage Is still below the 100% mark (-110bps MoM at 97.2%.

Capital Position

Capital Position of the Sector Remains Intact. CET1 Was Unchanged at 13.1%, Tier-1 Advanced by 1bp to 14.0 and Core Capital Increased to 17.5% (+1bp).

Source: Hong Leong Investment Bank Research - 2 Apr 2018