System loan growth strengthened for the 3rd consecutive month, rising by 5% YoY (vs. 4.9% YoY in May-18), driven by stable growth in both business and household loans. Applications surged strongly by 13.3% YoY (-9.2% YoY in May-18) and approvals grew 5.4% YoY (0.6% YoY in May-18). Deposit managed to record a higher growth of 5.2% YoY as compared to 4.8% YoY in May-18. Gross impaired loan finally improved (albeit marginally) by 1bps MoM to 1.59% in Jun-18. We maintain our 2018 loan growth target at 4.5%-5.0% and NEUTRAL rating on the sector. For exposure, our top pick is Public Bank (TP: RM26.00).

Loan Growth

System loan growth strengthened for the 3rd consecutive month, rising by 5% YoY in Jun-18 (vs. 4.9% YoY in May-18), driven by stable growth in both business and household loan growth. As expected, household loan growth was stronger by 5.8% YoY (vs. 5.6% YoY in May-18) while business loan growth held up well post-GE14, rising by 4.1% YoY (vs. 4.0% YoY in May-18). The stronger business loan growth was supported by (i) manufacturing (3.4% YoY vs. 2.0% YoY in May-18) and (ii) finance (1.6% YoY vs. 0.4% YoY in May-18) which mitigated the moderation in construction (10.7% YoY vs. 13.4% YoY in May-18). For the household segment, the faster growth was contributed by (i) credit card (2.8% YoY vs. 1.8% YoY in May-18) and (ii) personal use (6.7% YoY vs. 6.0% in May-18). Nevertheless, hire purchase was weak, declined by -1.2% YoY (vs. 0.1% YoY in May-18).

Loans – Leading Indicators

Leading indicators rebounded in Jun-18. Applications recovered strongly by 13.3% YoY (vs. -9.2% YoY in May-18) while approvals grew 5.4% YoY (0.6% YoY in May- 18). The strong growth in applications was supported by both business (18% YoY vs. -5.9% YoY in May-18) and household (9.7% YoY vs. -11.6% YoY in May-18) segments. In household, hire purchase and residential recovered by 42.1% YoY (vs. - 5.6% YoY in May-18) and 1.2% YoY (vs. -15.4% YoY in May-18). Meanwhile, manufacturing and real estate supported the recovery in business segment with the growth of 45% YoY (19% YoY in May-18) and 22% YoY (-13% YoY in May-18) respectively.

In loan approvals, the slack in business segment by -1.2% YoY (vs. 17.7% YoY in May-18) was well mitigated by the growth in household segment by 12.4% YoY (vs. - 11.3% YoY in May-18), which was in turn driven primarily by (i) hire purchase (55.5% YoY vs. -8.1% YoY in May-18) and (ii) personal use (14.1% YoY vs. -5.2% YoY in May-18).

Overall, approvals rate grew at a faster pace of 48.1% (45.8% in May-18) underpinned by the acceleration of household loan.

Deposits & LD Ratio

Overall, deposit managed to record a higher growth of 5.2% YoY to RM1.81trn in Jun- 18 (vs. 4.8% YoY in May-18), contributed by fixed deposits and other deposits, which increased by 3.5% YoY and 6.8% YoY respectively. However, CASA grew at slower pace of 3.9% YoY (vs. 5% YoY in May-18) (with CASA ratio remained stable at 26.7%), mainly due to lower current deposits.

Lending Rate

BLR remained stable at 6.9% while ALR inched up by 8bps MoM to 5.05%. Interest spread widened by 9bps MoM to 1.38% due to higher ALR in Jun-18. We believe interest spread will start narrowing soon as the impact of repricing of longer term deposits starts to kick in, hence limited the upside for NIM growth.

Asset Quality

After weakening for 4 consecutive months, gross impaired loan finally improved marginally, by 1bps MoM to 1.59%. The improvement came on the back of improving NPL from business loan segment (which total impaired loan saw a 2.3% MoM decline), which more than mitigated lower asset quality at the household segment.

Capital Position

The industry remains well capitalized with the risk-weighted capital ratio (RWCR) and core capital ratio and CET1 stood at 17.0% and 13.5% and 12.7% respectively as at end Jun-18.

Rating

Maintain NEUTRAL. We reiterate NEUTRAL rating on banking sector. We deem that heighted uncertainties post-GE14 will dampen the sector’s near to mid-term outlook prospects.

Top Picks

Public Bank (BUY; TP: RM26.00).

Source: Hong Leong Investment Bank Research - 1 Aug 2018