Growth for both system loans and deposits were still slow at 3.9% and 4.6% YoY respectively. Also, leading indicators remained poor, asset quality did not improve, and interest spread narrowed. Despite these negative developments and the growth outlook for banks is modest, we draw comfort from the sector’s inexpensive valuations as it trading at -1.5SD to its 5-year mean P/B. We retain NEUTRAL and advocate selective stock picking rather than blanket exposure to the sector. Our preferred pick is Maybank (TP: RM9.50). Other BUYs are RHB (TP: RM6.45), Alliance (TP: RM3.70), and BIMB (TP: RM5.00).

Loans growth still weak. Aug-19’s system loans growth was kept at 3.9% YoY (vs Jul-19: +3.9%) as business (Biz) and household (HH) lending continued to print tepid acceleration of 2.5% and 4.6% respectively; this is a tad below our +4.0-4.5% growth expectations for the full year but we see a pick-up in the later part of 2019, coming from higher loan disbursements (positive YTD approvals flow through). In Biz, working capital (+2.1%) and non-residential property purchases (+2.2%) remained lacklustre. While for HH, the decline in auto financing (-1.6%) and slower personal loans (+2.8%) were the primary culprits.

Leading indicators remained poor. Loan application swung back to negative (-0.3% vs Jul-19: +0.5%) as credit demand from HH contracted 8.9% but was cushioned by Biz (+10.9%). Also, loan approvals tapered to +1.7% (vs Jul-19: +11.2%) given tighter lending at HH (-2.8%).

Deposits growth slowed further to 4.6% (vs Jul-19: +4.9%) primarily due to softer build-up in fixed deposits (+5.9% vs Jul-19: +6.6%); we believe banks are managing lower this expensive product category to prevent overexposure ahead of another potential OPR cut. In Aug-19, loan-to-deposit ratio (LDR) stood at 88% (highest seen was 89%, back in Feb-18). The general feedback from our discussion with banks, deposit taking competition has eased.

Asset quality not improving as gross impaired loans (GIL) ratio ticked up 1bp MoM to 1.61%. This was mainly from Biz (+2bp MoM), no thanks to the manufacturing and wholesale segments. Although, HH’s GIL was held steady, we saw an uptick of 3bp MoM for personal financing. Despite the non-improvement, sector’s GIL ratio is still at a low healthy level and broadly, we find that borrowers have the financial buffers to withstand severe shocks (see our 28 Mar-19 report, titled ‘On a steady ship’).

Interest spread got squeezed again. The average lending rate was flat vs a 2bp rise in 3-month board fixed deposit. In turn, the spread contracted 2bp to 1.90%. However, over the course of next few months, gradual recovery should take place as banks retire their expensive retail fixed deposits, (accumulated from prior rivalry). After normalizing, we believe sustaining net interest margins (NIM) would remain as an uphill challenge, seeing that the slower loans growth environment should encourage banks to engage in price-based competition to chip share away from one another.

Retain NEUTRAL. Although the growth outlook for banks is modest, we draw comfort from the sector’s inexpensive valuations as it trading at -1.5SD to its 5-year mean P/B. Those that favour exposure to this sector have to be selective. We like banks that give above average dividend yields (Maybank; TP: RM9.50), still eking out healthy growth (RHB; TP: RM6.45 & BIMB; TP: RM5.00), and valuations got bashed down to -2SD and trough P/B valuations (Alliance; TP: RM3.70).

Source: Hong Leong Investment Bank Research - 1 Oct 2019