Moderation in August Repayment Trend

The banking system loans saw an expansion of 0.6% mom (July18: 0.3% mom), and a yoy growth rate of 5.4% (July18: 5.3% yoy). The manufacturing, retail, business services, construction, real-estate and households (residential properties, personal use, credit cards) sectors continued to see loan growth expansion yoy. We believe that system loan growth in 2H18 may be stronger than 1H18 as we see a rising trend in new loan applications, while the repayment trend may be tapering down after peaking in June-July18. Reiterate our sector OVERWEIGHT stance with Maybank (MAY MK, BUY, PT RM12.00) and Aeon Credit (ACSM MK, BUY, PT RM18.40) as our sector top picks.

August 2018 Loan Indicators Remained Robust for Household Sector

The banking system’s August18 loans saw a slightly better yoy growth rate of 5.4% yoy (July18: 5.3% yoy), while expanding by 0.6% mom (July18: 0.3% mom) and 3.6% year-to-date (ytd). Annualized, this translates into a loan growth of 5.4% for 2018, above our 2018 full year target of 5.0%. Though we keep our loan growth target, we remain upbeat on potentially improving business and consumer confidence post-GE14. Positively, we see a moderation in the repayment trend and more certainty/clarity with respect to the new government’s policies to be key drivers to consumer and business loan growth. Breakdown of the August18 loan growth trends are as follows:

i) Business loan growth was up 0.7% mom and +3.8% yoy, as business activity picked-up (post-GE14), with stronger mom growth in the agriculture, wholesale/retail, business services and construction sectors. Real-estate, construction, wholesale/retail, business services and manufacturing are the key business sectors (collectively accounting for 32% of system loans) are the key drivers on a yoy basis. We believe that as the business capacity utilisation had increased from 77.5% (2016) to 82.6% (2017), as measured by MIER, there could be a need to invest further in capacity expansion.

ii) Household loan growth was up +0.6% mom (vs. 0.5% mom in July18) and +6.1% yoy, driven by the residential mortgages and personal financing. The auto loan applications and approvals, which peaked in June-July in 2018, saw some moderation in August18 (approvals -10% mom; application -17% mom) though it was still under the tax-holiday period.

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 144% (Aug18) while the loan-to-fund ratio remains ample at 83.7%. 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 August18, 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.

Rising Non-performing Loans – Commercial Property, Construction

Overall, the level of non-performing loans for the banks has increased on a year-to-date basis by 7.2% as at July18. This was driven primarily by the commercial property, construction, wholesale/retail/ restaurants, business services and residential property segments. Despite the increase, the system GIL has stayed relatively unchanged at 1.58% (August18) from Dec 2017’s level of 1.54%. In our view, this is still at manageable levels, which was also driven by expansion in loan volumes. Meanwhile, the rise in commercial property NPLs was partially due to SMEs with weaker cashflows.

Pullback of 10bps in the Average ALR Mom in August18

As at August18, the commercial banks’ average lending rate (ALR) was down by 8bps mom to 4.98%, while the 12-mth fixed deposit rate was unchanged at 3.33%. This could indicate some competition for financing in the banking sector in 3Q18. Should the ALR continue to see contraction, it could well mean that the banks’ NIM could be under pressure in 3Q18.

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 rebounded to 51.2 in June18 from 49.7 in June18. 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 July18, the labour-force participation rate as of Apr18 also continued to remain 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 1.33x 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 1.4x. Key risks: new NPL formation, NIM compression, higher funding costs, weaker loan growth, higher provisions on FRS 9 adoption.

Top Picks – Maybank, Aeon Credit

For Maybank (MAY MK, RM9.79, 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).

Aeon Credit (ACSM MK, RM16.10, 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 - 1 Oct 2018