The latest read on banking data remained unenthusiastic. System loans growth slowed down to 4.9% YoY (below expectations), while deposits tapered as well (+5.3%). That said, CASA picked up momentum (+2.6%) but overall funding cost continues to be expensive and NIM outlook is still challenging. However, asset quality was robust with GIL ratio improving to 1.46%. 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 is Maybank (TP: RM10.50). Other BUY recommendations are RHB (TP: RM6.60) and BIMB (TP: RM5.20).

Ebbing loans growth. Mar-19’s system loans growth slowed to 4.9% YoY (Feb-19: +5.0%); the business segment (Biz, +4.1%) remained unenthusiastic while household (HH, +5.3%) sustained. In Biz, loan repayments (+6.8%) outpaced disbursements (+2.9%) causing the slump; the 4.1% growth came from lumpy ‘other purpose’ lending (+11.4%) and working capital loans (+4.3%). While for HH, home mortgages (+7.1%) and personal financing (+6.5%) were primary growth contributors. Overall, Mar-19’s system loans growth is the 4th successive month of dullness. YTD, it grew only 0.5%, below our 3M19 expectation of 1.1-1.3%. For 2019, we still have a +4.5-5.0% target, as we see repayment rates normalizing downwards in months ahead.

Weak leading indicators. Loan applications continued to be lethargic (-6.0% vs Feb- 19: -14.1%), dragged by poor Biz (-8.5%) and HH (-3.9%) demand. However, loan approvals turned positive (+6.3% vs Feb-19: -6.7%) given more generous Biz lending (working capital +14.3% and non-residential properties +65.2%).

Waning deposits growth. The increase in system deposits tapered to 5.3% (vs Feb- 19: +6.3%) as costly products like fixed, foreign currency, and money market deposits decelerated. That said, CASA picked up momentum by growing 2.6% (vs Feb-19: +1.4%). Mar-19’s loan-to-deposit ratio (LDR) continued to be elevated at 87.3% (highest seen was 89%, back in Feb-18). Since LDR is near to its 10-year high, we see tendency of deposits competition not abating (but should be less intense vs 2-3 quarters ago as banks strive to avoid excessive negative carry).

Sturdy asset quality. Gross impaired loans (GIL) ratio remained steady and robust at 1.46% (vs Feb-19: 1.48%) - lowest level on record. Overall, we expect asset quality to stay relatively benign in 2019, backed by higher proportion of new loans vs slower new impaired loans formation. Also, we believe borrowers have the financial buffers to withstand severe shocks (see our 28 Mar-19 report, titled ‘On a steady ship’).

Interest spread widened. The average lending and 3-month board fixed deposit (FD) rate moved in opposite direction whereby the former inched up 1bp while the latter nudged down 1bp. In turn, the spread broadened 2bp to 1.88%. However, we still see challenging net interest margins (NIM) outlook on a sequential basis given diminishing flexibility to optimize LDR. Also, banks are now stuck with higher cost of funds, as result from the prior retail fixed deposit competition cycle.

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 is Maybank (TP: RM10.50) given its good dividend yield and low foreign shareholding level vs larger domestic peers. Other BUY recommendations are RHB (TP: RM6.60) and BIMB (TP: RM5.20).

Source: Hong Leong Investment Bank Research - 9 May 2019