Monetary indicators were mixed in July as M3 strengthened while M1 remained steady. Leading loan indicators in the durable goods sector (passenger car, residential properties) continued to show strong growth. On liquidity front, non residents increased their bond holdings while the pace of equity outflow slowed. We anticipate the uptick in consumer loan data to be transitory as consumers take advantage of the tax holiday period. Hence, we maintain our expectation OPR to remain at 3.25% in 2018.

DATA HIGHLIGHTS

Monetary indicators were mixed in July 2018. Broad money supply (M3) rose at a faster pace (+6.6% YoY; Jun: +5.8% YoY), while narrow money supply (M1) remained steady (+4.7% YoY; Jun: +4.7% YoY). Growth in loan applications normalised to +1.7% YoY after growing strongly in the previous month (Jun: +13.3% YoY). Meanwhile, loan approvals moderated (+0.6% YoY; Jun: +5.4% YoY).

Household deposit grew at a slightly higher pace (+5.5% YoY; Jun: +5.4% YoY) while business deposit growth decelerated (+7.7% YoY; Jun: +9.0% YoY). Foreign deposits rose at a faster pace of +5.9% YoY (Jun: +3.0% YoY).

Household loan-deposit gap remained small in July. Deposits grew at a slightly faster pace of +5.5% YoY (Jun: +5.4% YoY) as well as household credit (+6.0% YoY; Jun: +5.8% YoY).

Outstanding total loan growth charted a faster pace of +5.3% YoY (Jun: +5.0% YoY) driven by increase in household loans (+6.0% YoY; Jun: +5.8% YoY) and business loans (+3.7% YoY; Jun: +3.0% YoY). However, gross issuance of corporate bond moderated during the month (RM5.4bn; Jun: RM6.1bn). Nevertheless, bond redemptions was lower at RM2.9bn (Jun: RM4.0bn), which led to higher net issuance of corporate bond.

Notwithstanding the moderation in total loan applications, leading loan indicators for consumer sector remained strong in July as consumers continued to take advantage of tax holiday period amid high consumer sentiments. Loan applications for passenger cars recorded double-digit growth of +33.6% YoY (Jun: +43.5% YoY) in line with the strong growth in loans approved for passenger cars (+57.4% YoY; Jun: +58.7% YoY). Loan applications for residential properties also grew strongly (+14.5% YoY; Jun: +1.0% YoY). Meanwhile, loans approved for residential properties expanded, but at a gradual pace of +1.8% YoY (Jun: -1.6% YoY).

In the bond space, non-resident flows rebounded by +RM3.3bn after registering outflows for three consecutive months. The increase in risk appetite was in tandem with other regional markets. Foreign holdings may also have been supported by lower inflation expectations. On the equity front, non-resident recorded smaller pace of outflows (-RM1.7bn; Jun: -RM4.9bn).

Consequently, excess liquidity was higher at RM177.8bn (Jun: RM173.3bn). Similarly, other loan liquidity indicators, such as loan-to-fund ratio and loan to deposit ratio showed similar trends.

HLIB’s VIEW

We anticipate the uptick in consumer loan data to be transitory as consumers front load their purchases to take advantage of the tax holiday period. Hence, we maintain our expectation for BNM to maintain OPR at 3.25%.

Source: Hong Leong Investment Bank Research - 10 Sept 2018