The banking system loans continued to see a modest growth of +0.3% on a month-on-month (mom) basis in May18, while sustained a growth rate of 4.9% yoy. Nonetheless, as new loan applications and approvals moderated mom in May18, attributable to uncertainties related to the then-General Election, loan disbursements are likely to moderate in the next month or two. Hence, we may likely see weaker growth in system loans in June-July, but as confidence returns in tandem with the new government’s favourable policies, loan growth in 2H18 may be more robust than 1H18. We maintain our 2018 loan growth target of 5.0%. Reiterate sector OVERWEIGHT with Maybank (MAY MK, RM12.00, BUY) and Aeon Credit (ACSM MK, RM18.40, BUY) as our top sector picks.

May 2018 Loan Indicators Weaker; But Yoy Growth Sustained at 4.9%

The banking system’s May18 loans saw growth sustaining at 4.9% yoy, while growing at 0.3% mom. Annualized, the loan growth translates into 4.6% for 2018, which is still below our 2018 full year target of 5.0%. On a more positive note, we are keeping our 2018E loan growth target of 5%, on the back of gradually improving business and consumer sentiment post GE14, whereby there is more certainty with respect to the new government’s policies, which remains business-friendly and promotes socio-economic growth. Meanwhile, detailed loan growth trends are as such: i) Business loan growth was up 0.3% mom and +3.2% yoy, as business activities picked-up (post-Chinese New year), with stronger growth in the construction, real-estate, wholesale/retail, utilities and mining sectors. As business capacity utilisation rates (as measured by MIER) has risen from 77.5% in 2016 to 82.6% in 2017, we believe that there could be a need to invest further in capacity expansion. ii) For the household sector, May18 loan growth was up +0.32% mom and +5.6% yoy, driven by segmental growth in residential property, and personal financing. Auto loans in particular, is expected to see a reversal in growth (-1.5% yoy as at May18) in the coming months due to robust orders for new cars during the tax-holiday period subsequent to the abolition of the GST on 1 June18. In May 2018, loan indicators such as applications, approvals and disbursements pulled-back slightly.

Banking System Liquidity Remains Healthy and Ample

The banking system’s liquidity continued to improve to comfortable levels, as implied by the system’s Liquidity Coverage Ratio (LCR, Fig 29) of 142% (May18) while the loan-to-fund ratio remains ample at 83.0%. To recap, banks have been diversifying their funding sources to better manage currency and maturity mismatches, though deposits still remain the main source. It is encouraging that deposit growth has been on an uptrend since May 2016 (May18: 4.9% yoy). We do take note that the loan to deposit ratio for some banks has been on an uptrend, which will prompt banks to boost deposits further.

Increase in Impaired Loans Provisions Due to MFRS 9 Adoption

Overall, the level of non-performing loans for the banks have increased on a year-to-date basis by 6.7% as at May 18. This however, was in-line with the adoption of MFRS 9. Notably, the commercial property, credit cards, residential property and passenger cars segments NPLs were more elevated. System GIL ratio as a result, had increased to 1.6% (May18) from Dec 2017’s level of 1.54%

Recent Rate Hike Not Expected to Have Significant Earnings Impact

As at May17, the repricing of the commercial banks’ average lending rate was up +34bps (subsequent to the 25bps OPR hike in Jan18) and remains ahead of the repricing of the fixed deposits, which had expanded by 17bps, from Jan18 to May18. Overall, the degree of normalization in interest rates is not expected to result in a material impact on the banks’ bottom lines, ranging from 0.7-3.5% (based on our estimates). We also do not expect default rates to spike among borrowers (as the impact is expected to be benign while fundamentals in the economy remain strong).

Underlying Economic Trends Favour a Rebound in the Sector

We note that an improving global economic outlook and relatively stronger commodity prices are favouring a further rebound in banking sector earnings in 2018: i) Improving economic indicators – Malaysia’s 1Q18 GDP moderated to 5.4%, vs. 3Q17: 6.2% and 4Q17: 5.9%. The Nikkei Purchasing Manager Index moderated slightly to 47.6 in May18 from 48.6 in Apr18. Economic indicators are meanwhile, still positive, indicating no deterioration in business sentiment moving forward. ii) Robust labour market – As the unemployment rate remained unchanged at 3.3% in Apr18, the labour-force participation rate as of Apr18 also continued to maintain 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 small-ticket items. iii) Relatively stronger commodity prices – Commodity prices have been gradually turning around since 4Q16 (Fig 9) as the industry’s supplydemand 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 OVERWEIGHT call, as we foresee a sector core earnings growth of 6.6% yoy in 2018E, followed by a more modest 4.3% yoy in 2019E and 4.0% yoy in 2020E. The sector’s overall valuation in 2018E still appears attractive at a 1.28x P/BV multiple (on a forward basis) against the past-10- year average of 1.47x 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 – Maybank, Aeon Credit

For Maybank (MAY MK, RM9.00, BUY, TP: RM12.00 based on a 1.74x P/BV target), 2H18 is likely to improve post GE14, driving more fund-raising activities and loan growth (1Q18: -0.1% qoq) while asset quality (as implied by a GIL ratio of 2.37% in 1Q18) may likely sustain in 2H18. The Maybank group, being the largest lender in Malaysia, remains a key domestic and regional player in the banking space and capital markets. Cost-optimization (staff costs, administrative) remains management’s key agenda. FY18E’s CIR could potentially be better than its 2018 KPI of 48% due to improved operating income. 2018E credit cost could come in below our forecast of 53bps from potential recoveries and a possible uplift in R&R loans (which make up 0.26% of Maybank’s loan book as at Mar18). For Aeon Credit (ACSM MK, RM13.78, BUY, TP: RM18.40 based on a 13x P/E target on CY19E EPS), is on track to deliver a solid performance over FY19-21E, arising from positive outcomes of its value-chain transformation project (which focus on cost-reduction initiatives and improving staff productivity/efficiency), boosting its receivables’ returns and credit recoveries. Aeon Credit remains an attractive alternative (to banks) financial play, and its projected ROE of ~18-19% for FY19-21E is the highest among financial stocks in our universe,

Source: Affin Hwang Research - 2 Jul 2018