System loans growth (+5.0% YoY) tapered while the momentum for deposits was relatively unchanged (+6.3%). Besides, CASA expansion (+1.4%) remained subdued, keeping overall funding cost expensive and NIM pressure is expected to persist. Also, asset quality was still robust despite GIL ratio rising slightly to 1.48%. Overall, positive leads were still missing and hence, we find it difficult to be bullish on the sector. Maintain NEUTRAL since valuation is discounted at - 1SD to its 5-year mean P/B. Our preferred pick now is Maybank (TP: RM10.50). Other BUY calls are RHB (TP: RM6.60) and BIMB (TP: RM5.00).

Waning loans growth. Feb-19’s system loans growth tapered to 5.0% YoY (Jan-19: +5.5%); the business segment (Biz, +4.3%) was a drag while household (HH, +5.2%) chugged along. In Biz, the rapid pace of loans repaid (+4.8%) vs disbursed (-1.8%), caused the slowdown; collectively, the 4.3% rise came from lumpy ‘other purpose’ lending (+10.3%) and working capital loans (+5.2%). As for HH, home mortgages (+7.1%) and personal financing (+7.2%) continued to anchor growth. All in, Feb-19’s loans growth is the 3rd successive month of tepidness. YTD, it grew only 0.1%, off track from our 2M19 expectation of 0.9-1.0%. For the full year, we still have a +4.5- 5.0% target, as we see repayment rates normalizing downwards in upcoming months.

Dull leading indicators. Loan applications continued to be weak (-14.0% vs Jan-19: - 5.4%), weighed down by poor Biz (-20.5%) and HH (-8.5%) demand. Similarly, loan approvals stayed sluggish (-6.7% vs Jan-19: -4.8%), no thanks to cautious HH lending (purchase of securities -30.1% and credit card -29.0%).

Uninterrupted deposits growth. System deposits growth was relatively unchanged at +6.3% (vs Jan-19: +6.2%); main contributor was still from costly products like fixed, foreign currency, and money market deposits while CASA only nudged up 1.4%. Feb- 19’s loan-to-deposit ratio (LDR) stood high at 87.9%, similar to Jun-18’s elevated level. Since LDR is close to the 10-year high, we see persistency in deposits competition but at a less intense manner to prevent excessive negative carry.

Robust asset quality. Although gross impaired loans (GIL) ratio increased 2bp to 1.48%, this is still at very low levels. In 2019, we expect benign asset quality, backed by higher proportion of new loans vs slower new impaired loans formation. Besides, we believe that borrowers have the financial buffers to withstand severe shocks (see our 28 Mar-19 report, titled ‘On a steady ship’).

Stable interest rate spread. Both the average lending rate and 3-month board fixed deposit (FD) fell 1-2bp in Feb-19. In turn, the spread of 1.86% was largely flattish for 3 straight months. Regardless, 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 outpacing loans growth, creating a mild negative carry effect.

Maintain NEUTRAL. Still no catalysts to spur strong sector-wide growth in the offing. Also, there are risks of a potential OPR cut and muted capital market activities. That said, current valuation is fair as it is discounted at -1SD to its 5-year average P/B. Our preferred pick now is Maybank (TP: RM10.50), which we will elaborate more in our recommendation upgrade report tomorrow; essentially, the bullish stance is premised on being (i) a prime candidate for rotational yield play among FBMKLCI constituents and (ii) less susceptible to foreign equity sell-off. Other BUY calls within our coverage universe are RHB (TP: RM6.60) and BIMB (TP: RM5.00).

Source: Hong Leong Investment Bank Research - 1 Apr 2019