The corporate bond market (+8% year-to-date) has far outpaced the banking system loans growth (+1.8% ytd), and hence, partially explains the subdued growth in the banking loans segment, notwithstanding the moderation in the household segment’s growth. The shift in funding to the debt market is well-reflected by the subdued banking system’s business loans, which stood at a 1.2% ytd. Meanwhile, an almost equal amount of loan repayment vis-à-vis loan disbursements ytd, was also partially another factor. On a more positive note, the commencement of a new capex cycle, potentially in 2H17 should underpin system financing growth as well as the banking system’s loans. Maintain OVERWEIGHT. Sector top picks: AMMB, Public Bank and Maybank.

Subdued Banking System Loan Growth (+1.8% Ytd)

The banking system’s loans growth, which remained subdued at +1.8% ytd, is attributable to a few key factors:

i) the shift in funding to the corporate bonds market, which was reflected by a much stronger growth of +8% ytd July17 vis-à-vis the banking system’s business loan growth of +1.2% ytd. We believe that more corporates favoured the debt market due to the size (larger) and tenure (longer) of the funding, arising from the recent large scale infrastructure and construction projects;

ii) moderation in the household segment’s loan growth, with a ytd growth of 2.3% (annualized growth at 3.9% yoy); and

iii) banks continue to face problems with loan replenishment. An almost equal amount of banking system loan repayment vis-à-vis loan disbursements ytd (for both the household and business sectors).

That said, the banking system loans continued to hold up at 5.6% yoy in July, with household loans growth at 5.1% and business loans growth at 6.3% yoy. Key sectors driving loan growth were households, retail and trade, construction, real-estate and transportation. At this juncture, we foresee a downside risk to our 6% loan growth target for 2017, though the fourth quarter may potentially see more robust demand (Maybank, CIMB, RHB, HLB, AMMB could be eyeing these financing opportunities).

Banking System Liquidity Remains Healthy and Ample

The banking system’s liquidity remains ample and healthy, as implied by the system’s Liquidity Coverage Ratio (LCR, Fig 29) of 137% (Jul17) while the loan-to-fund ratio remains ample at 83.5% (Fig 28). To recap, banks have been diversifying its funding sources to better-manage currency and maturity mismatches, though deposits still remains the main source.

Source: Affin Hwang Research - 5 Sept 2017