System loan indicators in July18 continued to remain positive in the household sector, while the business sector saw some pullback. The banking system loans saw an expansion of 0.3% mom, and a yoy growth rate of 5.3%. Sectors such as manufacturing, retail, business services, construction and households (passenger cars, residential properties) continued to see loan growth expansion yoy. We believe that as more confidence returns to the system, 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, BUY, PT RM12.00) and Aeon Credit (ACSM MK, BUY, PT RM18.40) as our sector top picks.

July 2018 Loan Indicators Remain Robust for Household Sector

The banking system’s July18 loans saw a slightly better yoy growth rate of 5.3% yoy (June18: 5.0% yoy), while expanding by 0.3% mom and 2.9% year-to-date (ytd). Annualized, this translates into a loan growth of 5.0% for 2018, in-line with our 2018 full year target of 5.0%. We reiterate our view that post-GE14, business and consumer confidence will gradually improve on the back of more certainty with respect to the new government’s policies, which remains pro-business and pro-socio economic growth. Meanwhile, detailed July18 loan growth trends are as follows:

i) Business loan growth was down 0.1% mom and +3.7% yoy, as business activity picked-up (post-GE14), with stronger mom growth in the manufacturing, wholesale/retail and construction sectors. The realestate, wholesale/retail, business services and manufacturing are the key business sectors which account for 28% of system loans. We believe that there could be a need for businesses to invest further in capacity expansion due to the increase in capacity utilisation from 77.5% (2016) to 82.6% (2017), as measured by MIER.

ii) Household loan growth was up +0.5% mom (vs. 1.0% mom in June18) and +6.0% yoy, driven by the residential mortgages and personal financing. We continue to see sustained levels of applications and approvals in the auto loan segment (from June 18’s level), in light of the tax-holiday period. Nonetheless, the sharp growth in the auto segment may see a reversal by August.

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% (July18) while the loan-to-fund ratio remains ample at 83.4%. 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 while as at July18, it was up 5.8% yoy. We note that there were a few banking players which have been loading up retail deposits in 1H18 and taken steps to boost their liquidity coverage ratios, hence pushing up deposit pressure in the market. Nonetheless, we expect some of these imbalances to ease in 2H18 as banks embark on active NIM-management.

Increase in Impaired Loans Provisions Due to MFRS 9 Adoption

Overall, the level of non-performing loans for the banks has increased on a year-to-date basis by 6.5% as at July18. This was driven primarily by the commercial property, construction, transportation, wholesale/retail/ restaurants and residential property segments, as banks switched to the adoption of MFRS 9, which is based on a more stringent expected loss methodology. While system GIL has increased to 1.58% (July18) from Dec 2017’s level of 1.54%, this is still manageable levels.

The Average ALR on An Uptrend Since Jan18

As at June18, the commercial banks’ average lending rate was up another +8bps mom while the 12-mth fixed deposit rate was down by 12bps mom to 3.21%. The banking system’s ability to reprice loan rates higher and steady deposit rates support our view of stable NIM (2018: 2.35%; 2017: 2.32%) within the banking sector.

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 – While Malaysia’s 2Q18 GDP moderated to 4.5%, vs. 2Q17: 6.2% and 1Q18: 5.4%, the Nikkei Purchasing Manager Index rebound to 49.5 in June18 from 47.6 in May18. 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 fairly attractive sector core earnings growth of 6.7% yoy in 2018E, followed by a more modest 4.4% yoy in 2019E and 4.0% yoy in 2020E. The sector’s overall valuation in 2019E at 1.34x P/BV multiple (on a forward basis) is still below 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, RM9.96, 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 (2Q18: -0.1% qoq) while asset quality (as implied by a GIL ratio of 2.37% in 2Q18) 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 0.22% of Maybank’s loan book as at June18).

For Aeon Credit (ACSM MK, RM15.10, 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 - 3 Sept 2018