The banking system loans in Sept18 saw an expansion of 0.6% mom (Aug18: 0.6% mom), and a yoy growth rate of 5.7% (Aug18: 5.4% yoy). The yoy growth was underpinned by sectors such as manufacturing, retail, business services, construction, real-estate and households (residential properties, personal use, credit cards). New loan applications continued to hold up for the business sector while the household sector showed signs of tapering-off after the end of the GST-free period. Reiterate our sector OVERWEIGHT stance with Maybank (MAY MK, BUY, PT RM11.20) and Aeon Credit (ACSM MK, BUY, PT RM18.40) as our sector top picks.

Sept 2018 Loan Indicators Showed a More Robust Business Sector

The banking system’s Sept18 loans saw a slightly better yoy growth rate of 5.7% yoy (Aug18: 5.4% yoy), while sustaining a 0.6% mom growth rate. Based on the annualized year-to-date growth rate of 4.2%, this translates into a loan growth of 5.6% for 2018, above our 2018 full year target of 5.0%. At this juncture, we keep our loan growth target of 5% unchanged, on the back of the strong growth trend in 3Q18 while noting that business loan disbursements are also picking up. Positively, new government policies and the upcoming Budget 2019 announcement are expected to be key drivers to domestic loan growth. Details of the Sept18 loan growth trends are as follows:
i) Business loan growth was up 0.9% mom and +4.5% yoy, as business activity picked-up (post-GE14), with stronger mom growth in the agriculture, mining, wholesale/retail, business services, real-estate and construction sectors. Real-estate, construction, wholesale/retail, business services and manufacturing are the key business sectors (collectively accounting for 32.9% 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. 0.6% mom in Aug18) and +6.0% yoy, driven by the residential mortgages and personal financing. The auto loan applications and approvals, which peaked in June-July in 2018, continued to moderate in Sept18 (approvals -39.5% mom; application -42% mom).

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 139% (Sept18) while the loan-to-fund ratio remains ample at 84.1%. 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 Sept18, it was up 6.4% 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 3.9% as at Sept18 (an improvement from 7.2% in Aug 18). This was driven primarily by the commercial property, residential property, construction, wholesale/retail/ restaurants and business services. Given the improvement ytd NPLs, the system GIL has also improved from 1.58% August18 to 1.53% as at Sept18.

Pullback of 5bps in the Average ALR Mom in Sept18

The commercial banks’ average lending rate (ALR) continued to pullback by another 5bps mom to 4.93% in Sept, after declining by 9bps mom in Aug18. On the other hand, the 12-mth fixed deposit rate was unchanged at 3.33%. This could indicate some competition for financing in the banking sector in 3Q18 as some banks turned more aggressive on pricing. Should the ALR continue to see contraction, it could well mean that the banks’ NIM could come under more pressure in 4Q18.

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 inched up to 51.5 in September from 51.2% in Aug18. 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 3.4% in Aug18, 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 a sector core earnings growth of 3.8% yoy in 2018E, followed by a more modest 3.5% yoy in 2019E and 4.5% yoy in 2020E. The sector’s overall valuation in 2019E at 1.29x 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, higher provisions on FRS 9 adoption.

Top Picks – Maybank, Aeon Credit

For Maybank (MAY MK, RM9.49, BUY, TP: RM11.20 based on a 1.6x P/BV target), 2H18 is likely to improve post GE14, driving more fund-raising activities and loan growth (2Q18: -0.1% qoq). The long-term outlook for Maybank remains intact given its solid capital base (CET1: 13.6%; TCR: 18.25%) and leading position as the largest banking group in the country and fourth-largest in the ASEAN market. Among the big-cap financial stocks, Maybank remains our preferred pick as it remains fundamentally solid and operationally robust though outlook in 2H18 could be more challenging due to asset quality issues at its overseas units. Cost-optimization (staff costs, administrative) remains management’s key agenda to maintain a CIR target of below 48%.

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 - 1 Nov 2018