System loan growth continued its uptrend since April-18, rising 5.4% YoY (vs. 5.3% YoY in July-18) supported by stable growth of both household and business was a faster by 6.1% YoY (vs. 6.0% YoY in July-18) and 3.8% YoY (3.7% YoY in July-18). Leading indicators were on mixed with applications strengthening by 5.3% YoY (vs. 1.7% YoY in July-18) while approvals declined by -0.1% (vs. 0.6% YoY in July-18). Deposits growth continued to outpace loan growth, unchanged at 5.8% YoY since July-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 RHB Bank (TP: RM6.00).

Loan Growth

System loan growth accelerated for the 5th consecutive month, rising at stable pace of 5.4% YoY (vs. 5.3% YoY in July-18) against our full year forecast of 4.5-5%. Both household and business rose a faster by 6.1% YoY (vs. 6.0% YoY in July-18) and 3.8% YoY (3.7% YoY in July-18). Household segment continued to benefit from tax holiday period and the growth was backed by (i) purchase of securities by 7.2% YoY (vs.6.8% YoY in July-18), (ii) hire purchase by 0.2% YoY (vs. -0.5% YoY in July-18) and (iii) credit card by 4.9% YoY (vs. 2.8% YoY in July-18). Meanwhile purchase of residential property moderated marginally for 2 consecutive months to 8.2% YoY (vs. 8.3% YoY in July-18). On the business segment, the acceleration continued post GE14 supported by (i) construction by 14.7% YoY (vs. 13.6% YoY in July-18 (ii) real estate by 6.3% YoY (vs. 5.5% YoY in July-18) and (iii) manufacturing by 5% YoY (vs. 4.6% YoY in July-18).

Loans – Leading Indicators

Leading indicators were on mixed trend with applications strengthening by 5.3% YoY (vs. 1.7% YoY in July-18) while approvals declined by -0.1% (vs. 0.6% YoY in July- 18). Stronger application was attributed to business segment which increased by 7.2% YoY (vs. -14.7% YoY in July-18) while household softened to 3.9% YoY (vs. 14.9% YoY in July-18). On the business segment, sustained growth of real estate by 17% since July-18 and higher acceleration of wholesale & retail trade by 12% (vs. 2% YoY in July-18) supported the overall growth in business segment.

In loan approvals, household moderated further to 6.6% YoY (11.7% YoY in July-18). However, business segment narrowed the weakness by -8.3% YoY (vs. -12.1% YoY in July-18). Hire purchase and residential property caused the weakness in household, moderating by 33% YoY (55% YoY in July-18) and -1% (2% YoY in July- 18). In the business segment, finance & insurance (34% YoY vs. -46% YoY in July- 18, and finance & wholesale trade (19% YoY vs. 9% YoY in July-18) helped narrow the weakness.

Overall, due to weaker approvals, approvals rate softened further to 42.4% (43.5% in July-18) due entirely to weaker business approvals rate by -8.3% YoY while approval in the household segment moderated to 6.6%.

Deposits & Liquidity Ratio

Deposits growth continued to outpace loan growth, unchanged at 5.8% YoY since July-18 to RM1.83trn on the back of higher growth of repurchase agreement while other deposits slowed down, including fixed deposit and CASA to 3.5 YoY (3.8% YoY in July-18) and 3.4% YoY (3.4% YoY in July-18). In line with slower CASA growth, CASA ratio composition slowed down to 26.2% vs. 27.3% a year ago. The liquidity coverage ratio broadened to 144% (142% in July-18) while loan to fund ratio stood at little Changed at 83.7% (83.4% in July-18)

Lending Rate

BLR remained stable at 6.91% while ALR trended lower by 9bps MoM to 4.98%. Interest spread narrowed by 7bps MoM to 1.32% due to lower ALR in Aug-18 indicating the repricing of longer-term deposits due to OPR hike in Jan-18 has started to pressure interest spreads.

Asset Quality

Asset quality improved amid the end of festive season. GIL was unchanged at 1.58% as the higher NPL in household segment was offset by lower NPL in business segment for 2 consecutive months. We feel that household pose a minimal risk to banks GIL in 2H18 given the implementation of MFRS9 has curb the downside risk.

Capital Position

The industry remains well capitalized with the risk-weighted capital ratio (RWCR) and core capital ratio and CET1 stood at 17.4% and 13.9% and 13.2% respectively as at end Aug-18.
 

Source: Hong Leong Investment Bank Research - 1 Oct 2018