We reiterate our NEUTRAL view on the Banking Sector due to the lethargic industry statistics for June. Despite some margin expansion from the early increase in lending rates in anticipation of the hike in the overnight policy rate, loan growth had continued to decelerate. Furthermore, deposits growth lagged that of loans, which may result in higher funding costs in the future as other (more expensive) sources of funds are sought. On the upside, asset quality remained healthy.
Industry loan growth continues to be lacklustre. In June, industry loan rose by 9.3% YoY (May: +9.7% YoY), supported by business and household loans growth of 8.9% (May: +9.7% YoY) and 9.7% YoY (May: +9.8% YoY), respectively. Overall, this marks the fifth consecutive month of declining growth for the sector, no thanks to slower business loan expansion. Also, weaker loan disbursements (+10.5% YoY) vs. loan repayments (+16.7% YoY) contributed to the slowdown. So far (as at end-June), industry loan growth is still within our expectation of between 9-10%.
Data points to slower growth ahead. Looking at leading indicators, loan applications in June grew 4.3% YoY while loan approvals during the month declined by 5.5% YoY. Indeed, this is a worrisome trend as banks are becoming more cautious with their lending activities. Notably, loan approvals from sectors like agriculture, real estate and household remained sturdy while the rest experienced a decline.
Banks’ excess liquidity shrinking. As for industry deposits, at end-June, it ticked up by a slower pace (+6.5% YoY) compared to industry loans, shrinking banks’ excess liquidity (-4.4% YoY to RM291.5b). Consequently, the sector’s loan-to-deposit ratio (LDR) increased by 2.1ppts YoY to 81.4%.
Margin was surprisingly wider in June 2014. The interest rate spread rose 11bps to 1.60% in June 2014 as a result of higher average lending rate of 4.57% (+6bps YoY and +11bps MoM) and stable 3-month deposit rate of 2.97%. July 2014 should see margins widening further in light of the 25bps hike in the overnight policy rate on 10 Jul 2014.
Asset quality remained healthy, with net impaired loan ratio holding constant at 1.27%, while loan loss coverage dropped 51bps MoM to 104.4%. Asset quality is expected to remain healthy in July 2014. However, some deterioration in asset quality may be likely following the higher overnight policy rate.
Maintain NEUTRAL. We opine that the sector lacks re-rating catalysts for now, given: (i) lethargic loan growth going forward, (ii) short-lived net interest margins (NIMs) expansion, and (iii) valuation of Malaysian banks are relatively rich compared to their regional peers. Hence, we maintain our NEUTRAL rating on the sector. For individual banks, we have OUTPERFORM ratings on Alliance Financial Group (TP: RM5.25), BIMB Holdings (TP: RM4.55) and Maybank (TP: RM11.20) while the others are MARKET PERFORM (please refer to our peer comparison table at pg. 5).
Source: Kenanga