System loan growth continues to sustain positive momentum. Loan growth was faster by 6% YoY in Oct-18 (5.7% YoY Sept-18) compared against our loan growth forecast of 4.5-5.0% in 2018. Positive leading indicators were unable to sustain the positive momentum as both loan applications and approvals moderated in Oct-18 following strong growth for both recorded in Sept-18. 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

Positive trend continued in Oct-18 as system loan growth grew faster at 6% YoY (+5.7% YoY in Sep-18) vs. our forecast of 4.5-5.0%. Business loan advanced to 5.6% YoY vs. 4.5% while household loan growth slowed marginally to 5.9% vs. 6.0% YoY in Sept-18. Business loan was on an upward trend for 3 consecutive months, supported by construction (14.6% YoY vs. 15.6% YoY in Sept-18), manufacturing (7.7% YoY vs. 6.3% YoY in Sept-18) and finance, insurance and business (7.0% YoY vs. 5.4% YoY in Sept-18). On the household loan, leading the moderation were mortgage to 7.9% YoY vs. 8.0% YoY in Sept-18 and credit card to 2.7% YoY vs. 3.7% YoY in Sept-18. Hire purchase growth was flat at 0.3% as several car manufacturers introduced lower price as compared to GST regime.

Loans – Leading Indicators

Positive leading indicators were unable to sustain the positive momentum as both indicators moderated in Oct-18 following strong growth for both recorded in Sept-18.

Loan application weakened to -0.4% YoY vs. 6.1% YoY in Sept-18, linked to the weakness in business segment to -6.7% YoY vs. 18.7% YoY in Sept-18 while household segment rebounded to 5.2% YoY vs. -4.2% YoY in Sept-18. Construction and real estate declined faster by -34% YoY (23% YoY in Sept-18) and -44% YoY (- 6% YoY in Sept 18 which contributed to the subdued loan applications. In the household segment, mortgage, personal use and credit card were positive to 6.6% (- 2.6% YoY in Sept-18) YoY 8.7% YoY (-2.9% YoY in Sept-18) and 13.7% YoY (2.4% YoY in Sept-18).

Loan approvals remained positive, however the growth eased to 15% YoY vs. 25.5% YoY in Sept-18. Business approvals were the major disappointment for the moderation as it softened to 21.1% YoY vs, 54.1% YoY in Sept-18. On the flip side, household approvals mitigated the weakness by rising 9.9% YoY vs. 1.8% YoY in Sept-18. Household approvals were aided by mortgage (13.9% YoY vs. 2% YoY in Sept-18) and personal use (28.5% YoY vs. 14% YoY in Sept-18). The moderation in the business segment was caused by real estate which eased to 21% YoY vs. 49% YoY and finance, insurance and business activities to 28% vs. 79% YoY in Sept-18.

Overall, approvals rate eased to 49.1% vs. 50.3% aided mainly by household segment approvals rate (45.4% vs. 44.7% in Sept-18) while business segment approvals fell to 53.8% (vs. 55.9% in Sept-18).

Deposits & Liquidity Ratio

Overall liquidity situation improved, evidenced by excess liquidity of RM229bn (RM213bn in Sept-18) in the market, however LFR declined to 83.3 vs 84.1% in Sept18. The wider liquidity to 7.0% YoY (6.4% YoY in Sept-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 Oct-18 by 5% (4.3% in Sept-18) and 15% (10.5% in Sept-18). CASA growth eased to 2.5% vs 3.4% in Sept- 18, however composition increased marginally to 26.8%.

Lending Rate

BLR remained stable at 6.91% while ALR trended higher by 5bps MoM to 4.98%, resulting to wider spreads of 1.32%. Based on recent results season, most of the banks already complied with the NSFR minimum, thus this could provide some breathing space to spreads in view of deposits competition for longer term deposits.

Asset Quality

Asset quality improved to 1.52% (vs. 1.53% in Sept-18) attributed to the softening NPL in business segment to -4% YoY (-5% YoY in Sept-18) while household loan NPL was unchanged for 2 consecutive months.

Capital Position

The industry remains well capitalised with the risk-weighted capital ratio (RWCR), core capital ratio and CET1 stood at 17.2% and 13.8% and 13.1% respectively as at end Oct-18.

Rating

Maintain NEUTRAL. We reiterate NEUTRAL rating on banking sector. We of the view that banking operating income is limited by NIM compression and uncertainty in the NOII space (especially on forex and MTM) which will be offset by lower loan loss allowance.

Top Picks

RHB Bank (BUY; TP: RM6.00). RHB is expected to benefit from the rebalancing of loan book towards more consumer and SME segments which carries more profitable yields. Recovering overseas income (mainly from higher oil price) and lower provision is expected to boost its ex-Malaysia contribution despite tightening its credit underwriting. RHB has been beefing up its loan loss cover to close to industry level in view of MFRS9 standards.

Source: Hong Leong Investment Bank Research - 3 Dec 2018