System loans growth tapered to 4.5% YoY (missed expectations) but deposits held steady (+5.5%). That said, sequential NIM outlook is still challenging given the recent OPR cut and diminishing flexibility to optimize LDR. However, asset quality remained robust despite GIL ratio was up a tad to 1.51%. While we are beginning to observe positive leads, we prefer to wait for concrete confirmation through successive months of improvements to turn more bullish on the sector. For now, 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 calls are RHB (TP: RM6.50), Alliance (TP: RM4.20), and BIMB (TP: RM5.20).

Loans growth continued to ease. Apr-19’s system loans growth waned further to 4.5% YoY (Mar-19: +4.9%), no thanks to decelerating business lending (Biz, +3.2%) but was cushioned by steady household segment (HH, +5.2%). In Biz, quicker loan repayments (+15.9%) vs disbursements (+9.8%) induced the slippage; lumpy ‘other purpose’ lending (+10.6%) and working capital loans (+2.8%) contributed to the 3.2% increase. While for HH, home mortgages (+7.0%) and personal financing (+5.9%) supported its expansion. Overall, it was the 5th straight month of slowdown. YTD, it ticked up only 0.5%, falling short of our 1.5-1.7% 4M19 expectation. For the full year, we still expect +4.5-5.0% growth, seeing repayment rates normalizing downwards in upcoming months and economic activities regaining momentum.

Better leading indicators. There was some improvement in loan applications (+5.7% vs Mar-19: -6.0%) as credit demand for Biz picked up (+11.8%) but HH remained weak (+0.6%). Similarly, loan approvals followed-suit (+5.0% vs Mar-19: +6.3%) underscored by more accommodative HH lending (purchase of residential properties +13.3% and securities +66.7%).

Stable deposits growth. System deposits held steady at 5.5% (vs Mar-19: +5.3%) as both costly products like fixed deposits and CASA saw their growth sustained at 8.0% and 2.8% respectively. Loan-to-deposit ratio (LDR) during the month stood at 87% (highest seen was 89%, back in Feb-18). Since LDR is near to its 10-year high, we see deposits competition to persist (but should be less intense vs 2-3 quarters ago as banks strive to avoid excessive negative carry).

Healthy asset quality. Although we saw gross impaired loans (GIL) ratio picked up a tad to 1.51% (vs Mar-19: 1.46%), it was still at a very robust level; this was no thanks to the agriculture portfolio. Overall, we expect asset quality to stay relatively benign in 2019, given 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 narrowed. The average lending rate decreased 1bp vs a 1bp rise in 3-month board fixed deposit. Hence, the spread narrowed 2bp to 1.86%. Overall, we still see challenging net interest margins (NIM) outlook on a sequential basis given the recent OPR cut and 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. Without strong visible growth catalysts and tracking slower vis- à-vis the 5-year historical growth pace, we find that current valuation is fair, since it is trading at a discount (-1SD) to its corresponding time series mean P/B. That said, Maybank (TP: RM10.50) is our preferred pick to the sector given its good dividend yield and low foreign shareholding level vs larger domestic peers. Other BUY calls are RHB (TP: RM6.50), Alliance (TP: RM4.20) and BIMB (TP: RM5.20).

Source: Hong Leong Investment Bank Research - 3 Jun 2019