The banking system ended 2017 with a 4.1% yoy loan growth which was lower than the 5.3% in 2016 and our target of 5.0%. We believe that the stronger mom growth in Dec17 (+1.1%) was boosted primarily by strong business loan disbursements (+17.9% mom) vs. Nov17, specifically in construction and real estate. Nonetheless, other loan indicators such as applications and approvals were both down mom. On a positive note, sectors such as wholesale/retail trade/services, real estate, construction and transportation are sectors which could see stronger demand for financing in 2018. Maintain OVERWEIGHT. Sector top picks: Hong Leong Bank and Maybank.

Banking System Loans Grew 4.1% Yoy in 2017

The 2017 banking system loan growth moderated to 4.1% from 5.3% (2016) on the back of these factors:

i) Corporate bonds continued to be the preference (24.5% of system financing), as reflected by a much stronger growth of 15.4% yoy vis-à- vis the banking system’s business loan growth of 2.8% yoy. Amid the recent large scale infrastructure and construction projects as well as the prospects of higher borrowing costs moving forward, the shift in funding to the debt market was not a surprise due to its size (larger) and tenure (longer);

ii) Moderation in the household segment’s loan growth to 5.1% vs. 5.3% yoy growth in 2016; and

iii) Sluggish loan replenishment cycle. Ytd, disbursements (+5.3% yoy) (totalling RM1.1bn) are only 1.3% ahead of repayments (+6.7% yoy).

Key sectors driving the 2017 loan growth were households (mortgages, personal loans) retail and trade, construction, real estate and transportation. As anticipated, Dec17 was a relatively robust month for loan growth vs. Nov17. The banking system loans grew by 1.1% mom, largely driven by expansion in business loans (+1.8% mom); we saw a strong level of disbursements in Dec17, indicated by a 17.9% mom growth (in particular for sectors such as construction and real estate). Meanwhile, household loans grew at a more moderate pace of 0.6% mom in Dec17 while disbursements during the month were slightly negative. Other loan indicators such as new applications and approvals were in negative territory mom in Dec17, and we expect this trend to continue in Jan-Feb18; it should pick up after the Chinese New Year festive period.

Source: Affin Hwang Research - 2 Feb 2018