System loan growth rebounded in Apr-18, rising at faster pace of 4.8% YoY (4.4% YoY in Mar-18) as HH loan growth accelerated higher to 5.7% YoY. Business loan growth stopped declining and grew at a faster pace of 3.6% YoY (2.9% YoY in Mar-18). Application and approvals both rebounded strongly in Ap- 18. Application surged 20.1% YoY (marginal growth of 0.1% in Mar-18) and approvals grew at the same rate of 21.6% YoY (-7.6% YoY in Mar-18). Deposits growth continued to outpace loan growth for 2 consecutive months, rising at 5.6% YoY (5.2% YoY in Mar-18) to RM1.81trn. Asset quality weakened for fourth consecutive months at 1.58%, due to household loan. Capital remains intact despite moderation in the Tier 1 and core capital. 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 expanded at faster pace of 4.8% YoY in Apr-18 (4.4% YoY in Mar-18), spurred by higher HH loan growth (5.7% YoY (vs. 5.6% YoY in Feb-18 and Mar-18) and business loan growth (which has resumed on uptrend, growing by 3.6% vs. 2.9% in Mar-18). The increase in the HH loan was largely supported by residential property (9% YoY for 2 consecutive months), personal use (6.0% YoY vs. +5.4% YoY in Mar-18) and credit card (3.9% YoY in Mar-18). On the other hand, hire purchase remained weak with the growth of 0.5% (0.4% YoY in Mar-18). For the higher business loan in Apr-18, construction sector maintained double digit growth of 15.5% YoY (vs. 14.9% YoY in Apr-18) while manufacturing accelerated to 2.1% YoY (vs. 0.1% In Mar-18).

Loans – Leading Indicators

Both application and approvals rebounded strongly in Ap-18. Application surged 20.1% YoY (vs. marginal growth of 0.1% YoY in Mar-18) and approvals grew 21.6% YoY (vs. -7.6% YoY in Mar-18). The strong growth in loan applications were supported by both business and HH, which registered growth of 34.7% YoY (11.4% YoY in Mar-18) and 10.1% YoY (-8.1% YoY) respectively. Residential property and personal use supported the application growth whilst hire purchase recovered after 2 months of deceleration. In the business application, the growth was supported by real estate (101% YoY vs. -12% YoY) and manufacturing (42% YoY vs. 58% YoY in Mar- 18).

Loan approvals were underpinned by both household and business segments. Approvals within the business segment soared 21.6% YoY (-11.6% YoY in Mar-18), whilst household accelerated to 10% YoY (-3.6% in Mar-18).

Overall, approval rate declined marginally to 42.5% (vs 43.3% in Mar-18), Notwithstanding, approvals rate for both business and household eased marginally to 43.1% (44.1% in Mar-18) and 42% (42.6% in Mar-18) as rise in approvals was offset by the acceleration in the loan applications.

Deposits & LD Ratio

Deposit growth continued to outpace loan growth for 2 consecutive months, rising by 5.6% YoY (vs. 5.2% YoY in Mar-18) to RM1.81trn. Despite the higher growth, CASA eased by -0.3% MoM due to moderation in the demand deposits. Deposit growth in Apr-18 was chiefly from growth in fixed deposits (+4.9% YoY, unchanged since Mar- 18). Other deposits, namely foreign currency and NIDs slid by 11.3% YoY and 14% YoY respectively. CASA ratio eased marginally to 26.8% (vs. 26.9% in Mar-18) but it is still healthy for banking sector. System loan-to-deposit ratio increased marginally to 88.8% vs 88.5% in Mar-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 advanced marginally by 1bps MoM to 3.17% and the average lending rate for Apr-18 was up by 4bps MoM to 4.90%. Interest rate spread advanced 2bps to 1.21% due to higher ALR, however was partly mitigated by higher 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 +0.9% MoM due mainly to weakness within the HH segment, chiefly from hire purchase and personal use. Gross impaired ratio continued to deteriorate, rose marginally for the fourth consecutive month by 1bps MoM to 1.58%. Meanwhile, loan loss coverage remained below the 100% mark (-330bps MoM at 93.9%).

Capital Position

Capital position of the sector remains intact, despite the moderation in the CET1 ratio by 3bps to 12.9%, whilst tier-1 and core capital were eased by 2bps and 3 bps respectively to 13.7% and 17.2%.

Source: Hong Leong Investment Bank Research - 4 Jun 2018