Monetary indicators registered a moderation in September as M3 and M1 recorded slower pace of growth. Notwithstanding the improvement in total leading loan indicators, consumer durable goods leading loan indicators declined post tax holiday period. On liquidity front, non-residents reduced their bond holdings while equity flows rebounded slightly. We maintain our expectation for BNM to retain OPR at 3.25% but see risk of BNM reducing the SRR by 50bps should large capital reversals occur, leading to increase in cost of funding for banks.

DATA HIGHLIGHTS

Monetary indicators registered slower growth in September 2018. Broad money supply (M3) moderated +6.1% YoY (Aug: +6.4% YoY) while narrow money supply (M1) slowed to +4.1% YoY (Aug: +4.4% YoY). Growth in loan applications rose to +6.1% YoY (Aug: +5.3% YoY). Meanwhile, loan approvals surged by +25.5% YoY (Aug: -0.1% YoY).

Household deposit moderated to +5.2% YoY (Aug: +5.3% YoY) while business deposit growth slowed (+5.0% YoY; Aug: +6.9% YoY). Foreign deposits also slowed to +5.1% YoY (Aug: +6.8% YoY).

Household loan-deposit gap was slightly higher in September due to deceleration in household deposits on a monthly basis (Sep: +0.1%; Aug: +0.3%). Nevertheless, on an annual basis, household deposits moderated to +5.2% YoY (Aug: +5.3% YoY) while household credit decelerated to +6.0% YoY (Aug: +6.1% YoY).

Total loans grew to +5.7% YoY (Aug: +5.4% YoY). This was supported by stronger business loan growth (+4.5% YoY; Aug: +3.8% YoY) which offset the slight moderation in household loan growth (+6.0% YoY; Aug: +6.1% YoY). Gross issuance of corporate bond moderated in September (RM7.2bn; Aug: RM8.4bn).

Total leading loan applications rose to +6.1% YoY (Aug: +5.3% YoY). This was driven by increase in business loan applications (manufacturing, construction, finance, insurance and business activities) that offset the decline in household loan applications. Loan applications for residential properties reversed to a contraction (- 2.6% YoY; Aug: +3.0% YoY), similar to loan applications for passenger cars (-20.7% YoY; Aug: +9.1% YoY). Loan approvals rebounded strongly by +25.5% YoY (Aug: - 0.1% YoY), driven by business loans (education, health, wholesale retail trade).

In the bond space, non-resident holdings registered an outflow (Sep: -RM1.8bn; Aug: -RM1.8bn). The outflow was mainly attributed to the large volume of matured MGS papers during the period. On the equity front, non-resident flows rose slightly from the previous month’s outflows (Sep: +RM0.1bn; Aug: -RM0.1bn).

Excess liquidity was slightly lower at RM179.4bn (Aug: RM179.9bn). Loan-to-fund ratio and loan to deposit ratio showed similar trends.

HLIB’s VIEW

As anticipated loans to households moderated as consumers frontloaded their big ticket item purchases in Jun-Aug 2018. Meanwhile, business loans may have started to normalise after temporary pullback due to political uncertainty during the General Election period. We maintain our expectation for BNM to retain OPR at 3.25% but see risk of BNM reducing the SRR by 50bps should large capital reversals occur, increasing the cost of funding for banks.

Source: Hong Leong Investment Bank Research - 1 Nov 2018