Both system lending and deposits growth held steady at 4.6% and 5.5% YoY respectively. However, NIM outlook remains challenging given the recent OPR cut and waning flexibility to optimize LDR. As for asset quality, it stayed robust whereby GIL ratio stood at 1.52%. Although leading indicators appeared to turn better, it may be due to a low base effect from 2018. Hence, we prefer to wait for concrete confirmation through successive months of improvements to be more bullish on the sector. For now, retain NEUTRAL since valuation is discounted at -1SD to its 5-year mean P/B. Our preferred pick is Maybank (TP: RM10.50). Other BUYs are RHB (TP: RM6.50), Alliance (TP: RM4.20), and BIMB (TP: RM5.20).

Slower loans growth seems to be abating. May-19’s system loans growth held steady at 4.6% YoY (Apr-19: +4.5%) as the deceleration in business lending (Biz, +3.4%) has subsided while the household segment (HH, +5.3%) chugged along. In Biz, we noticed that loan disbursements (+11.5%) outpaced repayments (+7.8%); delving in further, lending for fixed asset purchases (+11.3%) and for ‘other purpose’ (+4.7%), backed the 3.4% rise. As for HH, home mortgages (+7.2%) and personal financing (+5.8%) fuelled its expansion. Overall, it was the first time in 6 months that we saw a pause in slowdown. Still, it ticked up only 0.9% YTD, falling short of our 1.9- 2.1% 5M19 expectation. However, we continue to expect +4.5-5.0% growth for the full year, seeing repayment rates normalizing downwards.

Better leading indicators. Loan applications was better (+14.8% vs Apr-19: +5.7%) as both credit demand for Biz (+12.8%) and HH (+16.4%) picked up pace; we believe this could be due a low base effect from last year given that potential borrowers may have adopted a wait-and-see stance, after the change in Government post GE14. Similarly, loan approvals followed-suit (+24.7% vs Apr-19: +5.0%) on back of more accommodative lending for both Biz (+26.6%) and HH (+23.0%) segments.

Steady deposits growth. System deposits expansion remained at 5.5% (vs Apr-19: +5.5%) as costly products like fixed deposits saw its growth sustained at 7.6%. Also, CASA gained momentum by rising 4.5%. In May-19, loan-to-deposit ratio (LDR) stood at 88% (highest seen was 89%, back in Feb-18). Since LDR is near to its 10-year high, we see deposits rivalry to persist (but should be less intense vs 2-3 quarters ago as banks strive to avoid excessive negative carry).

Stable asset quality. Although we saw gross impaired loans (GIL) ratio inched up a tad to 1.52% (vs Apr-19: 1.51%), it was still at a robust level. Overall, we expect asset quality to stay 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 widened. The average lending rate decreased 9bp vs a 24bp drop in 3-month board fixed deposit. In turn, the spread expanded 15bp to 2.01%. However, this will be short-lived and we still see challenging net interest margins (NIM) outlook given the recent OPR cut and diminishing flexibility to optimize LDR. Also, banks are now stuck with higher funding cost 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 - 1 Jul 2019