The banking system loans in Oct18 expanded by 0.3% mom (Sept18: 0.6% mom), and showed a yoy growth rate of 6.0% (Sept18: 5.7% yoy). The yoy growth was underpinned by sectors such as manufacturing, retail, business services, construction and households (residential properties, personal use, credit cards). Disbursements continued rising for household and business sectors, while loan approvals and applications have remained steady in Oct18 from a month ago. Reiterate our sector OVERWEIGHT stance with Maybank (MAY MK, BUY, RM9.39) and Aeon Credit (ACSM MK, BUY, RM15.20) as our sector top picks.

Oct 2018 Loan Indicators Showed a More Robust Business Sector

The banking system’s Oct18 loans saw a slightly better yoy growth rate of 6.0% yoy (Sept18: 5.7% yoy), while sustaining a 0.3% mom growth rate. Based on the annualized year-to-date growth rate of 4.5%, this translates into a loan growth of 5.4% 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. With new government policies after the Budget 2019 announcement, we expect consumer sentiment to gradually improve and hence, drive consumption spending. Details of the Oct18 loan growth trends are as follows:

i) Business loan growth was up 0.3% mom and +6.1% yoy, as business activity picked-up (post-GE14). We saw stronger mom growth in the manufacturing, construction and business services sectors. Realestate, 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 +0.4% mom (vs. 0.6% mom in Sept18) and +5.9% yoy, driven by the residential mortgages and personal financing. The auto loan approvals, which peaked in June-July in 2018, continued to moderate in Oct18 (approvals -23.7% mom). Positively, we saw new applications rising for passenger cars, residential property, personal use and credit cards month-on-month in Oct18.

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 147% (Oct18) 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.

Expansion of +5bps in the Average ALR Mom in Oct18; FD Rates Stable

The commercial banks’ average lending rate (ALR) continued to expand by another 5bps mom to 4.98% in Oct18 (from 4.93% Sept18). Meanwhile, the 12-mth fixed deposit rate was unchanged at 3.33%. Nonetheless, the conservative stance on liquidity have also resulted in deposit competition among banks, of which have led to higher funding costs and year-to-date NIM compression.

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 3.5% as at Oct18 (an improvement of 0.4% mom). The increase in NPLs was driven primarily by the commercial property, residential property and working capital lines (manufacturing, construction, wholesale/retail/ restaurants and business services). On a more positive note, the system GIL ratio has remained steady at 1.52% as at Oct18 (against 1.53% as at Sept18).

GDP Growth to Sustain, Driven by the Private Sector

We note that amidst moderating global growth and falling commodity prices year-to-date Nov18, our domestic economy are expected to be sustained by the private sector from capacity expansion, consumption spending and potentially a gradual recovery in commodity production.

Nonetheless, recent economic indicators all indicated a moderation - Malaysia’s 3Q18 GDP moderated to 4.4%, vs. 3Q17: 6.2% and 2Q18: 4.5%. Our Affin’s 2018 GDP growth forecast has been revised down to 4.8% from 5.0% while for 2019E at 5.0%. The Nikkei Purchasing Manager Index have also edged dpwn to 49.5 in October from 51.5% in Sep18.

As the unemployment rate remained unchanged at 3.3% in Sept18, 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.

Brent crude oil prices in particular, have seen a sharper correction since a month ago. A potential recovery in commodity prices, anticipated in 2019, 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 3.3% yoy in 2018E, followed by a more modest 3.7% yoy in 2019E and 4.7% yoy in 2020E. The sector’s overall valuation in 2019E at 1.3x 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, RM9.39, BUY, TP: RM11.20 based on a 1.6x P/BV target), the long-term outlook for Malayan Banking (Maybank) remains intact given its solid capital base (CET1: 13.6%; TCR: 17.6%) 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, RM15.20, 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 Dec 2018