The Dec19 banking system loans ended the year with a growth rate of 3.9% yoy (vs. our loan growth target of 3.3%), while seeing a slightly stronger mom growth rate of +0.7% due to drawdown of business, residential housing and credit card loans. Asset quality for the sector, as implied by a gross impaired loan ratio of 1.51% (remains manageable) though has increased from 1.48% in 2018. Certain economic sectors such as the agriculture, manufacturing and household, had contributed to the increase in system impaired loans in 2019 (+6.1% yoy). As we foresee a more subdued economic outlook in 2020, our loan growth target remains unchanged at 3% (despite the recent 25bps cut in the OPR) while not discounting the possibility of further increase in the system impaired loans as sentiment deteriorates. We maintain our NEUTRAL stance on the sector, with AMMB (AMM MK, RM3.70, BUY) and Aeon Credit (ACSM MK, RM12.98, BUY) as our top picks.

Dec19 Loan Growth Up 3.9% Yoy

The banking system saw loan growth of 3.9% yoy in 2019, while mom growth rose by 0.7%, beating our 2019 forecast of 3.3%. The stronger loan growth in Dec19 was attributable to drawdowns in household loans (primarily credit cards), as well as manufacturing, construction and realestate sectors. Nonetheless, the robust business loans disbursed in the month of December (+27% mom) may normalize in the coming months, based on the trend observed in the past 5 years (where there is always a spike in mom business loan growth in December), coupled with prevailing cautious sentiment (of which may cause deferment in business expansion plans). Details of the December loan-growth trends are as follows:

i) Business loan growth saw a full year growth of 2.7% yoy in December 2019 (while mom was up 1.0%). Wholesale/retail, manufacturing, business services, real-estate and construction are the key business sectors underpinning system loans (accounting for 32.6% of system loans). Disbursements started picking up in 2H19 vs. 1H19, with the month on December in particular seeing a robust growth (manufacturing, construction sectors).

ii) Household loan growth was up 4.7% yoy in December driven by growth in residential mortgages and credit cards in particular. New loan approvals and loan applications saw a pullback of 8.6% mom and 4.7% mom respectively, driven by mortgages.

Source: Affin Hwang Research - 3 Feb 2020