Monetary indicators strengthened further in June. Narrow money supply (M1) and broad money supply (M3) expanded by +13.1% YoY (May: +10.3% YoY) and +5.6% YoY (May: +4.7% YoY) respectively. Meanwhile, total leading loan indicators improved under the Recovery MCO. Foreign holdings of local bonds surged but continued to decline for equities, albeit at a slightly slower pace.

DATA HIGHLIGHTS

Monetary indicators strengthened further in June. Narrow money supply (M1) expanded by +13.1% YoY (May: +10.3% YoY) while broad money supply (M3) grew +5.6% YoY (May: +4.7% YoY). Reserve money declined at a somewhat steady pace (-21.2% YoY; May: -21.3% YoY). Meanwhile, total leading loan indicators improved amid a rebound in loan applications (+8.0% YoY; May: -39.0% YoY), disbursements (+8.1% YoY; May: -25.8% YoY) and smaller decline in loan approvals (-12.7% YoY; May: -54.4% YoY).

Deposits growth quickened to +4.4% YoY (May: +2.8% YoY), driven by higher household (+6.7% YoY; May: +6.4% YoY) and foreign deposits (+2.3% YoY; May: +1.3% YoY), as well as rebound in business deposits (+0.9% YoY; May: -0.9% YoY).

The household loan-deposit gap widened following higher household loans growth (+0.6% MoM; May: +0.3% MoM) relative to deposits growth (+0.6% MoM; May: +0.7% MoM). On an annual basis, both loans and deposits grew +3.5% YoY (May: +3.2% YoY) and +6.7% YoY (May: +6.4% YoY) respectively. Loans growth picked up (+4.1% YoY; May: +3.9% YoY), aided by higher household loans (+3.5% YoY; May: +3.2% YoY) which offset the moderation in business loans (+4.2% YoY; May: +4.5% YoY). The rebound in disbursements (+8.1% YoY; May: - 25.8% YoY) were mainly contributed by purchase of securities and working capital needs. Gross issuance of corporate bonds eased to RM6.7bn (May: RM7.1bn).

As economic activity reopened during the Recovery MCO, loan applications posted a rebound (+8.0% YoY; May: -39.0% YoY) amid a turnaround in household loan applications (+16.4% YoY; May: -59.7% YoY), driven by higher applications for passenger cars (+66.1% YoY; May: -58.8% YoY) and residential properties (+20.0% YoY; May: -59.5% YoY). The improvement could have been aided by measures announced in PENJANA plan to stimulate the automotive and property sector. Business loan applications contracted at a smaller rate (-2.4% YoY; May: -12.1% YoY), aided by manufacturing, wholesale and retail trade sectors. Loan approvals continued to fall, albeit by a smaller magnitude (-12.7% YoY; May: -54.4% YoY).

Net foreign inflow for local bonds surged by +RM11.8bn in June (May: +RM1.5bn), while net foreign outflow from equities eased slightly to -RM3.0bn (May: -RM3.1bn).

HLIB’s VIEW

While the demand for household loans improved, the strength and sustainability of the recovery may be limited due to concerns on economic and job prospects. Despite the reopening of economic activities, businesses may continue to face challenges as evidenced by continued contraction in business loan applications and slower business loan growth. While PM Muhyiddin announced a targeted extension on the loan moratorium and bank assistance, it is expected to help 3m borrowers, lower than 7.9m who are currently under the plan. Against the backdrop of uncertain growth outlook and muted inflation prospects, we maintain our expectation for BNM to reduce OPR by 25bps in 2H20.

Source: Hong Leong Investment Bank Research - 3 Aug 2020