Banking system loans ended the year in 2018 with a 5.6% yoy growth (2017: +4.1% yoy), while expanding by 0.6% mom (Nov18: +0.4% mom). The yoy growth was underpinned by sectors like manufacturing, retail, business services, construction and households (residential properties, personal use, credit cards). December saw a pullback in new loan applications and approvals (especially in the manufacturing, construction, education/health sectors), though disbursements remained positive. We maintain our NEUTRAL sector stance, with Maybank (MAY MK, BUY, RM9.54) and Aeon Credit (ACSM MK, BUY, RM15.30) as our top picks.

2018 Loans Grew at 5.6% Yoy; December Loan Indicators Moderate

The banking system’s loans in 2018 grew at 5.6% yoy (2017: 4.1% yoy), while sustaining a monthly growth rate of 0.6% mom. This was above our 2018 full-year target of 5.0%. For 2019E, we keep our loan growth target of 5% unchanged, noting that loan disbursements may gradually taper down due to a moderation in new loan applications towards the end on 2018. We note that business sentiment, though holding up, had not seen a strong pick up, largely due to caution arising from a slower global growth expectation. Longer term, with new government policies after the Budget 2019 announcement, we expect consumer sentiment to gradually improve and drive consumption spending. Details of the December 2018 loan growth trends are as follows:

i) Business loan growth was up 5.7% yoy, as business activity pickedup after the 14th General Election (GE14). Real-estate, construction, wholesale/retail, business services and manufacturing were the key business sectors (accounting for 33% of system loans) and key drivers on a yoy basis. According to MIER, business expectation is also turning more pessimistic based on a second consecutive quarter of reduction in the indices for capital investment (-12.9ppts qoq) and capacity utilization (-3.6ppts qoq) in 4Q18. We also noted a 22% mom decline in the new loan application for non-residential property, indicating less business appetite for expansion.

ii) Household loan growth was up 5.6% yoy in 2018 driven by residential mortgages and personal financing. Auto-loan approvals, which peaked in June-July 2018, continued to moderate in December (approvals -8.6% mom). New applications for residential property, and personal use continued to contract mom in December.

Banking System Liquidity Remains Healthy and Ample

The banking system’s liquidity continues to improve to comfortable levels, as implied by the system’s Liquidity Coverage Ratio (LCR, Fig 29) of 143% (December 2018), while the loan-to-fund ratio remains ample at 82.7%. To recap, banks have been diversifying their funding sources to better manage their currency and maturity mismatches, though deposits still remain the main source.

Commercial Banks Average ALR Inches Up in December

The commercial banks’ average lending rate (ALR) inched up to 5.02% in December from 4.98% in November, we believe largely in tandem with the rise in overall funding cost, largely driven by robust growth in system deposits, which was up 8.6% yoy in 2018 vs. loan growth of 5.6% yoy. The conservative stance on liquidity has also resulted in deposit competition among banks, which has led to higher funding costs and marginal NIM compression.

Rising NPLs Mainly in Residential and Commercial Property

Overall, the level of non-performing loans for the banks is showing some sign of improvement, with a yoy increase of 0.1% as at end-December. The increase in NPLs was driven primarily by the residential and commercial property segments, of which have shown some minor increase in terms of the GIL ratio. On a more positive note, the system GIL ratio has edged down further to 1.45% in Dec18 from 1.52% in Dec17 (with improvement seen in the manufacturing, transportation and utility sectors).

GDP Growth Likely to Sustain, Driven by the Private Sector

We note that amidst moderating global growth and falling commodity prices YTD through November, the domestic economy is expected to be supported by the private sector from capacity expansion, consumption spending and potentially a gradual recovery in commodity output.

Nonetheless, recent economic indicators all point to a moderation - Malaysia’s 3Q18 GDP moderated to 4.4%, vs. 6.2% in 3Q17 and 4.5% in 2Q18. To recap, Affin’s 2018E GDP growth has recently been revised down to 4.8% from 5.0%, while for 2019E, it is at 4.7%. The Nikkei Purchasing Manager Index has also edged down further to 46.8 in December from 49.5 in October.

As the unemployment rate remained unchanged at 3.4% in November, the labour-force participation rate also continued to remain at its highest levels over the past 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 correction since March 2018. A potential recovery in commodity prices, anticipated in 2019, would help to justify a higher carrying value and write-backs in value to the relatedloan accounts for banks, which previously had been written-down and recognized as an impairment charge.

Maintain Sector NEUTRAL

We maintain our NEUTRAL sector view as we foresee a sector core earnings growth of 3.1% yoy in 2019E, followed by 4.7% yoy in 2020E. The sector is currently trading at a 2019E P/BV multiple of 1.3x, vs. the past-10- year average of 1.52x and past 5-year average of 1.4x. It traded at -1SD or 1.2x during the last crisis in the period of October 2008-March 2009. Key downside risks: new NPL formation, NIM compression, higher funding costs, weaker loan growth, higher provisions on FRS 9 adoption. Upside risks: improving credit quality.

Source: Affin Hwang Research - 4 Feb 2019