System loans and deposits growth in Sep-19 waned further to 3.8% and 4.2% YoY respectively. Also, leading indicators continued to be frail, asset quality did not improve, and interest spread was flat. Despite these negative developments and the growth outlook for banks is modest, we draw comfort from the sector’s inexpensive valuations as it trading near -2SD 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: RM3.40), and BIMB (TP: RM5.00).

No pick-up in loans growth. Sep-19’s system loans slowed to 3.8% YoY (vs Aug-19: +3.9%) as business lending (Biz) tapered to 2.4% while household segment (HH) was held at 4.6%; 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 (+1.6%) remained dull. As for HH, the decrease in auto financing (-1.7%) and slower personal loans (+2.8%) were the main drags.

Still weak leading indicators. Loan application waned to -6.1% (vs Aug-19: -0.3%) as credit demand from Biz and HH declined 11.3% and 0.8%, respectively. Also, loan approvals swung back to negative (-8.7% vs Aug-19: +0.2%) given tighter lending at Biz (-18.1%).

Deposits growth decelerated to +4.2% (vs Aug-19: +4.6%) due to slower build-up in foreign currency and other non-mainstream deposits; we believe banks are managing these lower to prevent overexposure ahead of another potential OPR cut coupled with the slower loans growth environment. In Sep-19, loan-to-deposit ratio (LDR) stood at 89% (comparable to peak, back in Feb-18). The general feedback from our discussion with banks, deposit taking competition has eased.

Asset quality did not get better as gross impaired loans ratio (GIL) remained flattish MoM at 1.61%. However, HH’s GIL ticked up 3bp MoM, no thanks to the mortgage and personal financing. Whereas, Biz’s GIL fell 3bp MoM given improvement at the agriculture segment. Regardless, the sector’s GIL 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’).

Flattish interest spread. The average lending rate and 3-month board fixed deposits contracted 7bp MoM. Seeing the same quantum of decline, the spread stayed flattish at 1.91%. However, over the course of next few months, gradual recovery should take place as banks retire their expensive fixed deposits, (accumulated from prior rivalry). After normalizing, we believe sustaining net interest margins (NIM) would remain as an uphill challenge as the slower loans growth climate 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 near -2SD to its 5-year average 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 (Alliance; TP: RM3.40).

Source: Hong Leong Investment Bank Research - 1 Nov 2019