System loan growth continues to sustain positive momentum. Loan growth was a faster by 5.7% YoY in Sept-18 (5.4% YoY Aug-18) compared against our loan growth forecast of 4.5-5.0% in 2018. Positive signs continue, with the pick-up in the both household and business loan while loan application and approvals expanded YoY during the month. Also positive is the fact that deposit growth picked up pace while asset quality was stable. 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 continues to trend upward in Sept-18, rising at a faster pace of 5.7% YoY (5.4% YoY in Aug-18) vs. our forecast of 4.5-5.0%. Household loan growth sustained at 6.0% YoY (vs. 6.1% YoY in Aug-18) while business loan growth moved up to 4.5% YoY (from 3.8% YoY in Aug-18). Household loan growth was supported by residential property and personal use segments, which grew 8.2% YoY (8.3% YoY in Aug-18) and 7.2% YoY (6.8% YoY in Aug-18). Hire purchase loan growth was unchanged at 0.3% YoY since Aug-18) despite the tax holidays ended in Aug-18. The growth momentum in business loan was supported by construction (15.6% YoY, vs.14.7% YoY in Aug-18), manufacturing (6.3% YoY, vs. 5% YoY in Aug-18) and mining and quarrying (6.5% YoY vs. -4.4% YoY in Aug-18).

Loans – Leading Indicators

Leading indicators were positive, and these support loan growths especially the business segment. We are not surprised by the strength shown by leading indicators as most banks guided that demand for loans has recovered on clearer economic policy amid positive consumer sentiments. Loan applications advanced to 6.1% YoY (from 5.3% YoY in Aug-18) while loan approvals surged strongly to 25.5% (from -0.1% YoY in Aug-18).

Loan applications were aided by business segment, which grew 18.7% YoY (vs. 7.2% YoY in Aug-18) while household segment declined by 4.2% YoY (vs. 3.9% YoY in Aug-18). Within the business segment, construction increased by 23% YoY (-2% YoY in Aug-18), manufacturing increased by 30% YoY (10% YoY in Aug-18) and finance, insurance and business activities strengthened faster to 30% YoY (-50% YoY in Aug- 18). As for household loan, application for hire purchase declined by19.5% YoY (11% YoY in Aug-18) consumer spending weakened post tax holidays ended.

In loan approvals, business loan soared by 54.1% YoY (-8.3% YoY in Aug-18) while household loan moderated for the 3rd consecutive month, by 1.8% YoY (6.6% YoY in Aug-18). The strong growth in business was fueled by the growth in wholesale & retail trade (93% YoY vs. 19% YoY in Aug-18), manufacturing (59% YoY vs. 43% YoY in Aug-18) and finance insurance and business activities (51% YoY vs.34% YoY in Aug- 18). The moderation in household loan approvals, on the other hand, was weighed by hire purchase and credit card segments which grew by 5.6% YoY (vs. 33.2% YoY in Aug-18) and -9.2% YoY (vs. -4.2% YoY in Aug-18), respectively.

Overall, approvals rate advanced to 50.3% (vs. 42.4% in Aug-18), aided mainly by business segment approvals rate (55.9% vs. 40.8% in Aug-18) while household segment approvals rate increased marginally to 44.7% (vs. 43.6% in Aug-18).

Deposits & Liquidity Ratio

Overall liquidity improved, evidenced by excess liquidity of RM213.1bn in the market and LFR of 84.1% (83.7% in Aug-18). The wider liquidity to 6.4% YoY (5.8% YoY in Aug-18) was backed by higher deposits growth which continued to outpace loan growth Fixed deposits and foreign currency deposits supported the higher deposits growth in Sept-18 by 4.3% YoY (3.5% YoY in Aug-18) and 10.5% YoY (-6.9% YoY in Aug-18). CASA growth was unchanged at 3.4% YoY, and composition was down marginally to 25.9% vs. 26.6% a year ago.

Lending Rate

BLR remained stable at 6.91% while ALR trended lower by 5bps MoM to 4.93%, resulting to narrowed spreads of 1.28%. We believe the recent delayed of NSFR rule could provide some breathing space to spreads in view of deposits competition for longer term deposits.

Asset Quality

Asset quality normalized back to 1.53% (vs. 1.61% in Aug-18) attributed to the softening NPL in business segment to -5% YoY (-1% YoY in Aug-18) while household loan NPL was unchanged.

Capital Position

The industry remains well capitalized with the risk-weighted capital ratio (RWCR) and core capital ratio and CET1 stood at 17.3% and 13.9% and 13.2% respectively as at end Sept-18.

Source: Hong Leong Investment Bank Research - 1 Nov 2018