Industry statistics for August were mainly positive. The deceleration in system loan growth came to a halt while leading indicators such as loan approvals and applications pointed north. However, we opine that these could be short-lived in nature. To note, deposit-taking activities was still slowing and in turn prevailing NIM pressure is not expected to ease. Although asset quality remains sturdy for now, it could deteriorate under rising inflation and higher cost of borrowing environment. All in, we reiterate our NEUTRAL stance on the sector. We are still bullish on MBSB (TP: RM2.65) and RHBCAP (TP: RM10.00) given that they are possible acquisition targets. Meanwhile, our other OUTPERFORM calls on MAYBANK (TP: RM11.20) and AEONCR (TP: RM17.80) are premised on value.

Deceleration in loans growth came to a halt. System loan growth in August 2014 provided some cheer since its decelerating trend for the past six months (Feb-July) came to a halt (+8.6% YoY vs. July: +8.6% YoY). Both business and household loan showed signs of resiliency, growing at 8.1% and 9.1% YoY, respectively. Although current industry loan growth is slightly below our expectation of +9-10% YoY for 2014, we are keeping it for now.

Positive leading indicators. To our surprise, total loan applications for August were encouraging where it expanded 9.4% YoY (July: -8.1% YoY), thanks to stronger demand from the business segment. In turn, total loan approvals also improved albeit at a slower pace (+5.9% YoY vs. July: -9.1% YoY). Similarly, total loan disbursements spiked up by 15.1% YoY (July: +5.0% YoY). We opine that these positives are one-off and to be short-lived in nature as private consumption in the near term is seen to be lethargic causing slowdown in overall lending activities.

System excess liquidity thinning, higher LDR. In August, system deposit continued to grow at a slower clip of 5.6% YoY (July: +6.5% YoY) vs. system loan growth of +8.6% (July: +8.6% YoY). As a result, industry’s loan-todeposit ratio (LDR) was lifted to 81.8% (July: 81.0%) while system excess liquidity shrunk 6.3% YoY (Jul: -1.9% YoY). The latter, now, only makes up 18.2% of total deposit base (July: 19.0%).

Interest spread reverts to per-July level. Meanwhile, the interest spread between the average lending rate (ALR) and the 3-month fixed deposit (FD) rate expanded back to June 2014’s level, at 1.57% (July 2014: 1.48%). The reversion came as ALR increased (to 4.69%) while the FD rate held steady at the post-overnight policy rate (OPR) level of 3.12%. Having restored pre-OPR margins, interest spread should hover comfortably around this level, at least for the next month or so.

Asset quality continued to improve in August 2014, as gross impaired loans ratio declined to 1.75% (-26bps YoY) and loan loss coverage stayed above the 100%-mark. We believe that banks are monitoring their asset quality closely in view of the higher cost of living especially with the impending implementation of the Goods and Services Tax on 1 April 2015 and a possible second 25bps increase in the OPR rate (to 3.5%). Hence, we expect asset quality to be maintained in the coming months.

NEUTRAL rating maintained. Although the set of data for August 2014 were positive all around, we are still taking the view that moving forward, banks will likely struggle to hold steady their margins in the face of rising cost and stiffer competition. Furthermore, the valuations of Malaysian banks are relatively rich at the moment. Hence, we continue to maintain NEUTRAL on the sector. Having said that, we are still bullish on MBSB (TP: RM2.65) and RHBCAP (TP: RM10.00) given that they are possible acquisition targets. Meanwhile, our other OUTPERFORM calls on MAYBANK (TP: RM11.20) and AEONCR (TP: RM17.80) are premised on value. The remaining stocks under our coverage are MARKET PERFORM.

Source: Kenanga