Both system lending and deposits growth slowed down to 4.2% and 5.1% YoY respectively. Also, leading indicators have again turned negative. Besides, NIM outlook remains challenging given the recent OPR cut and waning flexibility to optimize LDR. As for asset quality, it stayed at low healthy level where GIL ratio was at 1.57%. For now, retain NEUTRAL since valuation is discounted at -1SD to its 5-year mean P/B. Our preferred pick is Maybank (TP: RM10.30). Other BUYs are RHB (TP: RM6.45), Alliance (TP: RM4.20), and BIMB (TP: RM5.00).

Resumption of slower loans growth. Jun-19’s system loans growth slowed to 4.2% YoY (vs May-19: +4.5%), no thanks to deceleration in both household (HH, +4.9%) and business lending (Biz, +3.4%); this is below our +4.5-5.0% growth expectation for the full year but we see a pick up later part of the year from downward normalizing re payment rates. In Biz, fixed asset purchases (+12.8%) and for ‘other purpose’ loans (+7.0%), backed the 3.4% rise. As for HH, home mortgages (+7.1%) and personal financing (+3.2%) fuelled its 4.9% expansion. That said, drags were seen for lending to purchase transport vehicles (-3.5%) and passenger cars (-0.3%).

Leading indicators turned negative. After showing a nice rebound last month, loan applications dipped again (-11.7% vs May-19: +13.3%) as both credit demand for HH (-10.2%) and Biz (-13.4%) sagged; this could be due to a high base effect from last year given the 3-month tax holiday between Jun to Aug-18 (abolishment of GST). Similarly, loan approvals followed-suit (-3.3% vs May-19: +25.4%) on back of stricter lending, particularly at the HH segment (-6.3%).

Slowdown in deposits growth. System deposits growth tapered to 5.1% (vs May-19: +5.6%) as all segments decelerated, especially foreign currency deposits (+3.5% vs. May-19: +6.0%). In Jun-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).

Steady asset quality. Although gross impaired loans (GIL) ratio inched up a tad to 1.57% (vs May-19: 1.53%), it was still at a low healthy 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 contracted. The average lending rate declined 4bp vs a 2bp drop in 3-month board fixed deposit. In turn, the spread compressed 2bp to 1.99%. Overall, we continue to 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. .

Retain NEUTRAL. Although the growth outlook for banks is modest, we draw comfort from the sector’s strong asset quality and capital position. For now, valuations look fair with P/B trading at -1SD to its 5-year mean, while also resting close to the regression line. Overall, we advise long-term investors who strongly favour sector exposure to be selective. Preferred pick is Maybank (TP: RM10.30) for its above-average dividend yield and low foreign share-holding level vs larger domestic peers. Other BUY ratings are RHB (TP: RM6.45), Alliance (TP: RM4.20) and BIMB (TP: RM5.00).

Source: Hong Leong Investment Bank Research - 1 Aug 2019