Banking data in November were decent. System loans grew 6.2% YoY, beating expectations while deposit advanced 6.5%. Also, asset quality remained steady, not showing any signs of deterioration as GIL ratio is now at the lowest level on record. However, there were no strong positive leads and we reckon things may not be entirely upbeat for 2019. Currently, sector valuation is fair and hence, we stay NEUTRAL. RHB (TP: RM6.60) is our top pick for its attractive risk-reward profile, trading at -1SD to its 5-year mean P/B and potential for dividend upside.

Loan growth quicken again. November’s system loan growth stayed robust, coming in at 6.2% YoY. This was supported by both the household (HH, +5.7%) and business (Biz, +6.3%) segments. In HH, the expansion was from home mortgages (+7.7%) and personal financing (+7.8%). While in Biz, lumpy ‘other purpose’ lending (+19.7%) and construction loans (+10.2%) fuelled the rise. Overall, it is the 5th consecutive month of quicker acceleration (>5.0%), bringing 11M18 annualized loan growth to 5.5%. This surpassed our 2018 expectation of 4.5-5.0% and with only 1 month left, we believe it will settle at +5.0-5.5%. That said, we still see 2019 loan growth tapering to 4.5-5.0% given the lack of strong positive leads in both the HH and Biz segments.

No leading indicator spurts. Loan application decreased 24.3% YoY, making it the 2nd back-to-back month of contraction; weakness came from both the HH (-14.3%) and Biz (-34.7%) segments. Also, loans approval fell 6.7% but was mainly dragged by the HH side (for car purchases, -19.8% and credit card, -32.0%).

Deposit growth gathered momentum. System deposits rose a commendable 6.5% YoY but were driven by more expensive products like fixed, foreign currency, and money market deposits. However, CASA grew a mere 3.2%. During the month, loan to-deposit ratio (LDR) fell to 87.6% (-1.0ppt vs June’s elevated level) as deposit growth outpaced the increase in loans. Considering LDR is hovering close to its 10- year high, we think deposits competition could continue into 2019. That said, the rivalry should not be too intense to avoid excessive negative carry from idle deposits.

Steady asset quality. No signs of deterioration as gross impaired loans (GIL) ratio remained stable and strong at 1.49% (vs October’s 1.52%). This marks the lowest level on record. Barring any unforeseen circumstances, in 2019, we expect asset quality to stay relatively benevolent, driven by higher proportion of new loans against slower new impaired loans formation.

Interest rate spread widened. In November, the 3-month board fixed deposit (FD) rate inched down 1bp. This led to a broader spread (1.83% vs 1.82% a month before) when stacked against the flattish average lending rate. However, net interest margins (NIM) compression in the near-term is still expected to persist due to: i) ongoing FD campaigns that offers high promotional rates, and ii) expansion in deposits outstripped lending growth, creating a mild negative carry situation.

Maintain NEUTRAL. While the sector chugged along quite nicely in 2018, things are not entirely upbeat this year. However, valuations are reasonable, hovering not too far to its 5-year mean P/B of 1.33x (at 1.25x). Besides, the 2-year earnings CAGR for the sector is 4.2% (from 2018-20), in line with the 4.5% historical 5-year level. Overall, we lean toward banking stocks that are priced attractively and have some potential for positive surprises. RHB (TP: RM6.60) fits the bill and is our top pick, trading at -1SD to its 5-year mean P/B and has an increasing chance to pay out higher dividends.

Source: Hong Leong Investment Bank Research - 2 Jan 2019