After 3 consecutive months of acceleration, system loan growth moderated marginally to 4.4% in Mar (4.5% in Feb). The deceleration was derailed by slower growth in business loan by 2.9% vs. 3.2% in Feb. Meanwhile household was still healthy at 5.6% YoY, unchanged since Feb. Leading indicators were in mixed trend, applications recovered marginally to positive territory (due to business loan (11.4% YoY vs. -7.2% YoY in Feb). Nevertheless, approvals continued on negative trend derailed by both household and business. Deposits improved strongly by 5.2%, CASA ratio weakened marginally to 26.9% of total deposits. Asset quality weakened for third consecutive months at 1.57%, due to household loan. Capital remains intact as Tier-1 and core capital were unchanged. However CET1 strengthened to 13.2%. 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

System loan growth eased marginally to 4.4% YoY in Mar-18 (from 4.5% YoY in Feb- 18). The growth was supported by HH loan which grew at a more stable pace of 5.6% for 2 consecutive months, and business loan growth of 2.9% YoY (vs. 3.2% YoY in Feb-18). The firm growth in HH was supported by residential property (9% YoY unchanged for 2 months), personal use (5.4% YoY vs. 4.9% YoY in Feb-18) and credit card (3.9% YoY vs. 3.8% YoY in Feb-18). Business loan growth eased to 2.9% YoY (from 3.2% YoY in Feb-18), and it was derailed by weaker agriculture of -8.6% YoY vs. -0.5% YoY in Feb-18 whilst manufacturing posted flat growth. Construction and real estate remain healthy at 14.9% YoY (12.7% YoY in Feb-18) and 5.8% YoY (5% YoY in Feb-18)

Loans – Leading Indicators

Applications and approvals were mixed, with applications reversing the negative trend (to a marginal growth of 0.1% YoY) whilst approvals stayed on negative trend. Loan applications improved marginally by 0.1% YoY in Mar-18 (vs. -5.8% YoY in Feb-18), helped mainly by business loan applications (11.4% YoY vs. -7.2% YoY in Feb-18). On the other hand, household applications dipped further by -8.1% YoY (vs. -4.6% YoY in Feb-18), mainly attributed to further weakness within the residential property segment, which declined by 11.1% YoY (vs. -11.8% in Feb-18). In contrast, business applications were stronger by 11.4%, supported by finance, insurance and business activities (62% YoY vs. -30% YoY in Feb-18), and manufacturing (58% YoY vs 19% YoY in Feb-18).

Loan approvals were hampered by both household and business segments in Mar-18. Approvals within the business segment were down by -11.6% YoY (vs. -20.5% YoY in Feb-18), whilst household dipped by 3.6% YoY (vs. 10.6% YoY in Feb-18). Within the approvals segment, residential property deteriorated to negative for the first time in 15 months (-8.1% YoY vs. +1.2% in Feb-18), and non-residential posted stronger growth of 22.1% YoY (vs. 8.8% YoY in Feb-18).

Overall, approval rate remained unchanged at 43.3% as lower approvals in Mar-18 were offset by higher applications. Nevertheless, household approval rate dipped to - 3.6% vs. 10.6% YoY in Feb-18.

Deposits & LD Ratio

Deposits outpaced loan growth in Mar-18, rising at stronger pace of 5.2% YoY (vs. 4.2% YoY in Feb-18) to RM1.81trn. The strong growth in deposits was fueled by higher CASA growth of 6.3% YoY (vs. 6.7% YoY in Feb-18). Other deposits, namely foreign Currency and NIDs Slipped by -9.1% YoY and -22.2% YoY Respectively. CASA Ratio Weakened Marginally to 26.9% Vs. 27.7% But It Is Still Healthy for Banking Sector. System Loan-to-deposit Ratio Decreased Marginally to 88.5% Vs 89.7% in Feb-18, Due to Deposit Growth Which Outpaced Loan Growth. Other Liquidity Indicators Such as Loan To-fund Ratio and Loan-to-fund-equity Showed Improving Trend.

Lending Rate

The 3-month Deposit Rate Was Unchanged at 3.16% and the Average Lending Rate for Mar-18 Was Up by 7bps to 4.78%. Interest Rate Spread Advanced 8bps to 1.19% Due to Higher ALR and Lower 3-months Interbank. We Believe Stable CASA Growth Will Provide Cushion the Narrowing NIMs That Continued to Plague by Stiff Price-based Competition for Deposits.

Asset Quality

Absolute NPL Rose Marginally by +1.8% MoM Due Mainly to Weakness Within the HH Segment, Chiefly From Hire Purchase and Personal Use. Gross Impaired Ratio Rose Marginally for the Third Consecutive Month by 2bps MoM to 1.57%. Meanwhile, Loan Loss Coverage Remained Below the 100% Mark (-330bps MoM at 93.9%).

Capital Position

Capital Position of the Sector Remains Intact, With CET1 Ratio Improving by 10bps to 13.2%, Whilst Tier-1 and Core Capital Were Unchanged at 14% and 17.5% Respectively.

Source: Hong Leong Investment Bank Research - 2 May 2018