Monetary indicators continued to strengthen in July. Narrow money supply (M1) and broad money supply (M3) expanded by +15.7% YoY (Jun: +13.1% YoY) and +6.1% YoY (Jun: +5.6% YoY) respectively. Meanwhile, total leading loan indicators were weaker for the month. Foreigners continued to increase holdings of local bonds but reduced holdings of equities.

DATA HIGHLIGHTS

Monetary indicators continued to strengthen in July. Narrow money supply (M1) expanded by +15.7% YoY (Jun: +13.1% YoY) while broad money supply (M3) grew +6.1% YoY (Jun: +5.6% YoY). Reserve money declined at a slightly slower pace (- 19.0% YoY; Jun: -21.2% YoY). Meanwhile, total leading loan indicators were weaker amid moderation in loan applications (+5.9% YoY; Jun: +8.0% YoY) and lower loan approvals (-14.3% YoY; Jun: -12.7% YoY) and disbursements (-3.4% YoY; Jun: +8.1% YoY).

Deposits grew +4.5% YoY (Jun: +4.4% YoY), supported by higher household (+7.1% YoY; Jun: +6.7% YoY), foreign (+2.7% YoY; Jun: +2.3% YoY), and business deposits (+2.0% YoY; Jun: +0.9% YoY).

The household loan-deposit gap continued to widen following higher household loans growth (+1.1% MoM; Jun: +0.6% MoM) and steady deposits growth (+0.6% MoM; Jun: +0.6% MoM). On an annual basis, loans and deposits expanded by +4.3% YoY (Jun: +3.5% YoY) and +7.1% YoY (Jun: +6.7% YoY) respectively.

Higher total loans growth (+4.5% YoY; Jun: +4.1% YoY) was attributed to the increase in household loans (+4.3% YoY; Jun: +3.5% YoY) following higher loan disbursements for purchase of passenger cars and residential properties, reflecting positive policy impact from the PENJANA recovery plan to stimulate the automotive and property sector. This offset softer business loans growth (+3.9% YoY; Jun: +4.2% YoY). Meanwhile, gross issuance of corporate bonds rose to RM7.0bn (Jun: RM6.7bn).

Loan applications moderated to +5.9% YoY (Jun: +8.0% YoY) amid slightly softer household loan applications (+15.4% YoY; Jun: +16.4% YoY). Growth remained supported by applications for passenger cars (+63.7% YoY; Jun: +66.1% YoY) and residential properties (+19.3% YoY; Jun: +20.0% YoY). Meanwhile, business loan applications recorded a steeper decline (-6.8% YoY; Jun: -2.4% YoY) following lower applications across all sectors, except transport, storage & communication. Loan approvals also contracted at a faster rate (-14.3% YoY; Jun: -12.7% YoY) amid lower approvals in both household (-7.8% YoY; Jun: -20.1% YoY) and business sector (- 22.6% YoY; Jun: -5.2% YoY).

Net foreign inflow for local bonds eased to +RM8.3bn in (Jun: +RM11.8bn), while net foreign outflow from equities eased to -RM2.5bn (Jun: -RM3.0bn).

HLIB’s VIEW

While household loan applications continue to recover, loan approvals remain in negative territory, which suggest banks remain cautious on lending practises. While household loan applications have improved, weak labour market may constrain the strength of recovery. In October 2020, automatic loan moratorium will be replaced with a more targeted loan moratorium plan, which could also weaken the economic recovery. 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 - 1 Sept 2020