The latest read on banking data did not excite us. System loans ticked up 5.5% YoY (missed expectations), while deposits rose 6.1%. That said, asset quality was still resilient with GIL ratio unchanged at 1.45%. Besides, strong positive leads remained absent and overall, 2019 is panning out to be a less upbeat year for banks. Regardless, our NEUTRAL stance on the sector is intact as valuation is fair. Focus continues to be on value play opportunities and banking stocks with little risk of earnings downgrade by the street. RHB (TP: RM6.60) and BIMB (TP: RM5.00) are our selective bets to the sector.

Loans growth tapered. System loans growth in Jan-19 fizzled further to 5.5% YoY (from 5.6% in Dec-18). This was caused mainly by the business segment (Biz, +4.8%) segment while household (HH, +5.5%) were still sturdy. In Biz, the rate of repayments (+17.5%) were quicker than disbursements (+14.0%), which led to its slowdown; contributors to the 4.8% increase were lumpy ‘other purpose’ lending (+12.1%) and construction loans (+7.9%). While in HH, growth was supported by home mortgages (+7.4%) and personal financing (+7.6%). Overall, this is the 2nd straight month of slower expansion. In turn, annualized 1M19 loans growth was only 3.6%, missing our 2019 expectation of 4.5-5.0% given the lack of strong positive leads. However, we expect some pick up in subsequent months.

Leading indicators still no spark. Loan applications lost its growth traction again (- 5.4% YoY); demand from both Biz (-7.9%) and HH (-3.5%) were poor. As for loan approvals, it was still uninspiring (-4.8%), dragged by Biz (‘other purpose’ -44.7% and construction -5.6%).

Slower deposits growth. System deposits growth lost pace to 6.1% YoY (vs Dec-18: 7.5%) but was still fuelled by costly products like fixed, foreign currency, and money market deposits while CASA ticked up by only 0.8%. In Jan-19, loan-to-deposit ratio (LDR) ticked up to 88% (similar to Jun-18’s elevated level). Since LDR is close to the 10-year high, we reckon deposits rivalry could persist. However, it should not be too intense to avoid excessive negative carry.

Resilient asset quality. No cracks as gross impaired loans (GIL) ratio stayed robust at 1.45% (flat vs Dec-18), remaining at the lowest level on record. In 2019, we expect benign asset quality, backed by higher proportion of new loans against slower new impaired loans formation. Further, we find that borrowers have the financial buffers to withstand severe shocks (see our report, titled ‘Get to the chopper’ on 10 Jan-19).

Interest rate spread stagnant. In Jan-19, both the average lending rate and 3-month board fixed deposit (FD) rose 2bp. This led to a stagnant spread of 1.87% in back-to back months. However, net interest margins (NIM) slippage in the short-term is still expected to persist due to: i) ongoing high promotional FD rate campaigns, and ii) deposits outstripping loans growth, creating a mild negative carry situation.

Maintain NEUTRAL. Without strong sector-wide growth as catalysts to drive up share prices, we reckon stock picking is critical. Hence, focus is on value play opportunities. Besides, we favour banking stocks that have track-record of not seeing profit cut by the street and also, with little risk of doing so, in the near-term. This is because we noticed the earnings downgrade trend had stunted share price performance of such stocks over the past 10-12 months. RHB (TP: RM6.60) and BIMB (TP: RM5.00) meet all these criteria, making them both BUY calls.

Source: Hong Leong Investment Bank Research - 1 Mar 2019