System loan growth continued its uptrend since April-18, rising 5.3% YoY (vs. 5.0% YoY in Jun-18) driven by faster growth in both household and business growth. Leading indicators turned weak after a strong signal in Jun-18. Applications slowed down to 1.7% YoY (vs. 13.3% YoY in Jun-18) while approvals softened to 0.6% YoY (-5.4% YoY in Jun-18). Deposit sustained a stable growth, rising to 5.3% to RM1.82trn (vs. 5.2% YoY in Jun-18) contributed by fixed deposits and other deposits. 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 remained on an uptrend for the 4th consecutive month, rising by 5.3% YoY (vs. 5.0% YoY in Jun-18). Both household and business growth was faster. The former picked up to 6% YoY (vs. 5.8% YoY in Jun-18) while the latter saw no sign of let up post-GE 14 with a growth of 3.7% YoY (vs. 3.0% YoY in Jun-18). The stronger business loan growth was supported by (i) construction (13.6% YoY vs. 10.7% YoY in Jun-18), (ii) real estate (5.5% YoY unchanged since Jun-18) and (iii) manufacturing (4.6% YoY vs. 3.4% YoY in Jun-18). For the household segment, the acceleration was supported by (i) residential property by 8.3% YoY, unchanged since Jun-18, (ii) personal use (7.7% YoY vs. 6.7% YoY in Jun-18) and (iii) credit card (2.8% YoY, unchanged since Jun-18).

Loans – Leading Indicators

Leading indicators weakened in July-18, with application softening to 1.7% YoY (vs. 13.3% in Jun-18) while approval growth moderated to 0.6% YoY (from 5.4% in Jun- 18). The softer loan applications was attributed to the business segment, down by - 14.7% YoY (+18.1% YoY in Jun-18) while household segment applications was stronger by 14.9% YoY (vs. 9.6% YoY in Jun-18). Business segment was impacted by (i) construction (-55% YoY vs. -4% YoY in Jun-18), (ii) transport, storage and communication (-15% YoY vs. +11% YoY in Jun-18) and (iii) finance, insurance and business activities (-34% YoY vs. -3% YoY in Jun-18). While in household loan, there was broad based expansion capitalized on the improving consumer sentiments. In loan approvals, business segment weakened further to -12.1 (vs. -1.2% YoY in Jun- 18). On a positive note, household remain stable at 11.7% YoY vs. 12.4% YoY in Jun- 18. Higher household approvals was mainly driven by hire purchase (55.3% YoY vs. 55.5% YoY in Jun-18) and personal use (27.4% YoY vs. 14.1% YoY in Jun-18) Overall, due to weaker application and approvals, approvals rate softened to 43.5% (48.1% in Jun-18), due entirely to weaker business approvals rate.

Deposits & LD Ratio

Overall, deposit sustained a stable growth, rising to 5.8% to RM1.83trn (vs. 5.2% YoY in Jun-18) contributed by fixed deposits and other deposits, which increased by 3.8% YoY and 10.4% YoY respectively. Nevertheless, CASA decelerated marginally by 3.8% YoY (vs. 3.9 YoY in Jun-18), that said CASA composition decreased to 26.6% of total deposits (vs. 26.7% in Jun-18), mainly due to lower current deposits.

Lending Rate

BLR remained stable at 6.91% while ALR inched up by 2bps MoM to 5.07%. Interest spread widened by 1bps MoM to 1.39% due to higher ALR in Jun-19. Despite higher

spreads for 6 months, we believe interest spread will start narrowing soon as the impact of repricing of longer term deposits will increase the cost of funds and hence limited the upside for NIM growth.

Asset Quality

Despite the festive seasons in July, asset quality improved for 2 consecutive months to 1.58 (1bps MoM), on the back of improvement in NPL from business loan segment. However we are of the view that the ratio is sustainable given strong growth in household loan would have potential downside to the GIL.

Capital Position

The industry remains well capitalized with the risk-weighted capital ratio (RWCR) and core capital ratio and CET1 stood at 17.7% and 14.2% and 13.3% 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 - 3 Sept 2018