Relatively Flat Mom Loan Growth in Oct17

Ytd-Oct17 banking system loans growth is still quite subdued at 2.7% given a mom growth of a mere +0.1% (with an annualized growth rate of 3.2%) vs. our full year forecast of 5%. On a positive note, sectors such as wholesale/retail trade/services, real-estate, construction and transportation are potentially sectors which could see stronger demand for financing in 2018, though for 2017 system loans was affected by corporate loan repayments. Maintain OVERWEIGHT. Sector top picks: Hong Leong Bank and Maybank.

Banking System Loan Growth (+2.7% Ytd)

The banking system’s loans growth, which has been relatively muted this year at +2.7% ytd and 4.6% yoy, is attributable to a few key factors:

i) the shift in funding to the corporate bonds market (24% of system financing), which was reflected by a much stronger growth of +13.3% ytd Oct17 vis-à-vis the banking system’s business loan growth of +1.3% ytd. Amid the recent large scale infrastructure and construction projects as well as the prospects of higher borrowing costs moving forward, it is not a surprise for the shift in funding to the debt market due to the size (larger) and tenure (longer);

ii) moderation in the household segment’s loan growth, with a ytd growth of 3.8% (annualized growth at 4.54%) vs. >10% yoy growth prior to Dec14; and

iii) loan replenishment continues to remain sluggish. Ytd, loan disbursements was slightly behind loan repayments. As at Oct17,on a cumulative basis, loan disbursements was up 6.1% yoy while loan repaid had increased by 7.5% yoy.

The banking system loans growth continued to hold up at 4.6% yoy in October, with household loans growth at 5.1% and business loans growth at 4.0% yoy. Key sectors driving loans growth were households, retail and trade, construction, real-estate and transportation. Holding all else constant, despite the subdued loan growth ytd, banks had continued to see robust expansion in the 9M17 fund-based income (+10.3% yoy) as a result of the lower overall funding cost and repricing of loans. This was also reflected in the 9M17 NIM, which was up +9bps yoy to 2.33%. On a positive note, we do not discount the possibility of stronger loan growth in the months of Nov-Dec, which we had seen in the previous years.

Banking System Liquidity Remains Healthy and Ample

The banking system’s liquidity continued to improve at comfortable levels, as implied by the system’s Liquidity Coverage Ratio (LCR, Fig 29) of 138% (Oct17) while the loan-to-fund ratio remains ample at 83.0% (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.

3Q17 NIM Held Up Steadily Qoq, as FD Rates Picked Up

The banking sector’s 3Q17 NIM continued to hold up steadily at 2.33% against 2Q17,) as fixed deposit rates remained at 3.1% in July-Sept17 (vs. 3.08-3.1% in Apr-Jun17) while the average lending rate (ALR) was relatively unchanged at 4.61-4.62% (July-Sept17) against 2Q17. Meanwhile, CASA ratio also held up well in Oct17 improving mom to 26.9% (vs. 26.7% in Sept1717) as it continued growing at a more robust rate of 9.5% yoy. With the combination of these factors, we believe that the banking sector’s NIM will continue to outperform that of last year even in 4Q17. Since 3Q16, most banks have been able to stem the decline in NIM, which averaged at 2.26% in 2016.

Slight Improvement in Impaired Loans Across the Board

Non-residential property and loans for the purchase of fixed assets are the few segments which are showing some stress in terms of asset quality as at Oct17 (Fig 31-34), although overall impaired loans saw slight improvements. As at Oct17, the gross impaired loan ratio had declined slightly on a mom basis at 1.65% while the outstanding gross impaired loans have increased by 5.2% ytd (declined by 1.0% mom).

Underlying Economic Trends Favour a Rebound in the Sector

We note that an improving global economic outlook and relatively stronger commodity prices are in favour of a further rebound in banking sector earnings in 2017:

i) Improving economic indicators – Malaysia’s 3Q17 GDP grew at 6.2%, higher than expected (vs. 2Q17: 5.8% and 1Q17: 5.6%). On the other hand, we note that economic indicators such as the Nikkei Malaysia Purchasing Manager Index had shown a reversal since June17 (at 46.9%), currently at 48.6% as at Oct17. The overall import and export growth rates also remained robust, at levels higher than 2016.

ii) Robust labour market – While the unemployment rate stood at 3.4% (Sept17), the labour-force participation rate as of Sept17 are at the highest levels in two years and the workforce is still growing in tandem with population growth. A robust labour market would be supportive of increased consumer spending and demand for both big and smallticket items.

iii) Relatively stronger commodity prices – Commodity prices have been gradually turning around since 4Q16 (Fig 9) as the industry’s supply-demand dynamics continue to improve. A recovery in commodity prices would help to justify a higher carrying value and writebacks in value to the related-loan account, which previously had been written-down and recognized as an impairment charge.

Maintain Sector OVERWEIGHT

We maintain our sector OVERWEIGHT call. We foresee sector-earnings growth of 8.7% yoy in 2017E, followed by a more modest 5.8% yoy in 2018E and 3.7% yoy in 2019E (EPS growth: +7.0% in 2017E, +4.2% in 2018E, +2.7% in 2019E). Favourable domestic demographic trends (driving consumption and housing needs), ample infrastructure projects in the pipeline and accommodative monetary policy are supportive reasons for the growth in earnings. The sector’s overall valuation in 2017E still appears attractive at a 1.31x P/BV multiple (on a forward basis) against the past-10-year average of 1.6x and the past-5-year average of 1.5x. Key risks: new NPL formation, NIM compression, higher funding costs, weaker loan growth, much higher provisions on FRS 9 adoption.

Top Picks – Hong Leong Bank, Maybank

After Hong Leong Bank (HLBK MK, RM15.14, BUY, TP: RM17.00 based on a 1.38x CY18E P/BV target) reported a strong set of 1QFY18 results on the back of robust fund-based income growth and significant recovery in its 20%-owned Bank of Chengdu, we believe that its potential upside will be driven by lower operational costs and increased income generation from digital initiatives and rationalization of branches to provide ‘state-of-the-art’ banking solutions. Asset quality risk is also seen as minimal, with a GIL ratio of 0.98% as of Sept17 being supported by a high impaired loan coverage of 148% (including regulatory reserve). NIM also continued to surprise with a +12bps improvement yoy to 2.13% in 1QFY18 as management also leverages on ample liquidity on balance sheet. For Maybank (MAY MK, RM9.25, BUY, TP: RM10.50 based on a 1.5x P/BV target), we foresee a better year underpinned by robust fund-based income generation, while NIM is expected to remain steady. Asset quality is expected to improve as global headwinds ease, while its Indonesian unit is also showing signs of a turnaround. Dividends also are also attractive, with net yields of 6.3% to 6.7% 2017-2019E.

Source: Affin Hwang Research - 4 Dec 2017