Monetary indicators were mixed in October as M1 growth moderated while M3 growth accelerated. Total leading loan indicators slowed on the back of decline in business loan applications that offset the rebound in consumer loan applications. On the liquidity front, non-residents increased their bond holdings but pulled back on equity flows. We maintain our expectation for BNM to retain OPR at 3.25% in 2019.

DATA HIGHLIGHTS

Monetary indicators were mixed in October 2018. Broad money supply (M3) accelerated to +8.0% YoY (Sep: +7.2% YoY) while narrow money supply (M1) slowed to +3.2% YoY (Sep: +4.1% YoY). Loan applications slipped -0.4% YoY (Sep: +6.1% YoY). Meanwhile, loan approvals moderated to +15.0% YoY (Sep: +25.5% YoY).

Household deposit edged higher by +5.3% YoY (Sep: +5.2% YoY). Business deposit slowed (+4.7% YoY; Sep: +5.0% YoY) while foreign deposits decelerated (+1.1% YoY; Sep: +5.1% YoY).

Household loan-deposit gap was stable in October due to steady growth in monthly household loans (+0.4%; Sep: +0.4%) amid moderate rise in household deposit (+0.3%; Sep: 0.1%). Annually, household deposits rose (+5.3% YoY; Sep: +5.2% YoY) while household credit moderated slightly to +5.9% YoY (Sep: +6.0% YoY).

Total loans grew at a faster pace of +6.0% YoY (Sep: +5.7% YoY), driven by stronger business loan growth (+5.6% YoY; Sep: +4.5% YoY) which offset the slight moderation in household loan growth (+5.9% YoY; Sep: +6.0% YoY). Gross issuance of corporate bonds rose to RM13.0bn in October (Sep: RM7.2bn).

Total leading loan applications contracted by -0.4% YoY (Sep: +6.1% YoY). This was mainly attributed to weaker business loan applications (retail, construction, real estate) which declined by -6.7% YoY (Sep: +18.7% YoY). Leading loan applications for households strengthened. Loan applications for residential properties rebounded by +6.6% YoY (Sep: -2.6% YoY) as well as loan applications for personal use (+8.7% YoY; Sep: -2.9% YoY) and credit card (+13.7% YoY; Sep: +2.4% YoY). However, loan applications for passenger cars continued to decline but at a slower pace (- 15.4% YoY; Sep: -20.7% YoY).

In the bond space, non-resident holdings rebounded, registering an inflow of +RM5.4bn (Sep: -RM1.8bn) despite weak global investor sentiment. This could be attributed to the inclusion of Malaysia’s 10-year MGS and 5-year GII bond into the JP Morgan Index. Consequently, foreign ownership of MGS papers rose to 40.7% (Sep: 39.5%). Meanwhile on the equity front, non-residents pulled back on their holdings (Oct: -RM1.5bn; Sep: +RM0.1bn).

Excess liquidity higher at RM189.0bn (Sep: RM179.4bn). Loan-to-fund ratio and loan to deposit ratio showed similar trends.

HLIB’s VIEW

Business loans may have started to normalise after temporary pullback due to political uncertainty during the election period. Nevertheless, the strength of the increase in business loans applications may be contained by the uncertain economic outlook. We maintain our expectation for BNM to retain OPR to retain OPR at 3.25% in 2019 and expect no changes in SSR unless liquidity conditions worsen significantly.

Source: Hong Leong Investment Bank Research - 3 Dec 2018