Industry statistics for July remain uninspiring. System loan growth continued to taper while deposit taking activities did not gain any traction. Furthermore, leading indicators for future growth such as loan approvals and applications pointed south. Furthermore, the prevailing NIM pressure is not expected to ease. Another concern is that asset quality of banks might deteriorate given rising inflation and higher cost of borrowing, which could affect the capability of existing borrowers to meet financial obligations. Hence, we reiterate our NEUTRAL stance on the sector. MAYBANK (TP: RM11.20), RHBCAP (TP: RM10.00) and MBSB (TP: RM2.65) are OUTPERFORMs as we opine that the former is a value buy while the other two are premised on rising sentiment for M&A play.

Further deceleration in industry loan growth. July 2014 saw a sixth consecutive month of decelerated industry loan growth (Jul: +8.6% YoY vs. Jun: +9.3% YoY), on lower growth in loan disbursement of +5.1% YoY (Jun: +10.5% YoY). Both business loan and household loan grew by a smaller 8.0% YoY (Jun: +8.9% YoY) and 9.3% YoY (Jun: +9.7% YoY), respectively. The potential deceleration, however, was capped by slower growth in loan repayment of 15.5% YoY (Jun: +16.7%). As a result, year-to-date industry loan stood at RM8,783.5b, which remains within our expectation of 9-10% industry loan growth.

Data suggests deceleration will persist. Leading indicators suggests that the trend of declining loan growth will persist as banks continued to hold back on loan approvals in July (Jul: -9.1% YoY vs. Jun: -5.5% YoY), while loan applications fell into the negative territory (Jul: -8.1% YoY vs. Jun: +4.3% YoY). The largest decline in approvals was in the household sector (-13.4% YoY) followed by education/health (-73.4% YoY) and also real estate (-7.8% YoY).

System excess liquidity shrunk, LDR inched up. In July, system deposits grew at slower clip of 6.5% YoY (Jun:+6.5% YoY) vs. system loan growth of 8.6% YoY (Jun: +9.3% YoY), lifting the industry’s loan-to-deposit ratio (LDR) to 81.0% (+1.6% YoY). Similarly, system excess liquidity continues to shrink (July: -1.9% YoY vs. Jun: -4.3% YoY), making up 19% of total deposits base (Jun: 18.6%).

Interest spread narrows in July 2014. As a result of the 25bpts hike in overnight policy rate (OPR) on 10 July, we saw the interest spread between average lending rate (ALR) and 3-mth fixed deposit (FD) rate narrowed to 1.48% vs. 1.60% a month ago. Essentially, the rise in ALR lagged the increase in FD rates. We think this is because of: (i) rising competition in the market to augment deposit base, and (ii) banks had generally started to factor in the potential hike in OPR into their ALRs ahead of the official announcement date.

Asset quality remained robust, as net impaired loans declined 11bpts YoY to 1.27% while loan loss coverage stayed above the 100% mark in July. That said, with rising inflation along with higher cost of borrowing, asset quality might deteriorate. There could possibly be another 25bpts hike in OPR (to 3.5%) during the Monetary Policy Committee (MPC) meeting on 18 Sept.

Maintain NEUTRAL. The sector currently still lacks re-rating catalysts, given: (i) muted loans growth, (ii) NIM compression from rising competition, and (iii) Malaysian banks are rich in valuations vis-à-vis to their regional peers. All in, we maintain our NEUTRAL rating on the sector, For individual banks, we have OUTPERFORM recommendations on MAYBANK (TP: RM11.20), RHBCAP (TP: RM10.00) and MBSB (TP: RM2.65) while the others are MARKET PERFORM. (please refer to our peer comparison table at pg. 5).

Source: Kenanga