Industry statistics for September were a mixed bag. System loan growth expanded quicker than the previous month and loan approvals saw improvement as well. However, asset quality showed early sign of deterioration, which could further worsen on the back of rising inflation and higher cost of borrowing. Separately, deposit-taking activities continued to slow down and hence, NIM pressure is likely to return despite interest spread widening temporarily. This is in view of stiff pricedriven competition in the market. All in all, we reiterate our NEUTRAL stance on the sector given lack of re-rating catalysts. That said, we have selective OUTPERFORM calls on: (i) MAYBANK (TP: RM11.20), (ii) PBBANK (TP: RM20.00), (iii) CIMB (TP: RM7.15) and (iv) AEONCR (TP: RM17.80) while others are MARKET PERFORMs.

Slight uptick in system loans growth but still below expecations. System loan grew 9% YoY, marking a slight improvement compared to August (+8.6% YoY), thanks to a pick-up in the business segment (+8.8% YoY vs. Aug: +8.1% YoY). Household loan, however, was held at +9.1% YoY. When annualized, industry loan grew 8% YoY, a tad slower than our expectation of +9-10% YoY for 2014. Essentially, the slowdown was caused by higher loan repayments (Ytd-14: +16.5% YoY) which outpaced the rise in loan disbursements (Ytd-14: +13.6% YoY).

Industry loan applications robust, loan approvals up. Demand for business loan remains robust, expanding by 12% YoY (vs. Aug: +18% YoY) while household loan was tepid (+0.6% YoY vs. Aug: +0.2% YoY). Applications for business loan were mainly for working capital (+25.1% YoY) and construction activities (+18.5% YoY). Overall, total loan applications increased by 6.7% YoY in September (Aug: +9.4% YoY). As for loan approvals, it rose 12.1% YoY, quicker than the growth in the previous month (Aug: +5.9% YoY).

Asset quality showed signs of deterioration. On a YoY basis, net impaired loans (NIL) ratio declined 7bpts to 1.3% while loan loss coverage (LLC) stayed above the 100%-mark. However, on a MoM basis, NIL grew 3bpts while LLC dropped 2ppts. Hence, this could be an early sign of deteriorating asset quality in view of rising inflation and higher cost of borrowing.

System LDR inched higher, excess liquidity shrinking. System deposit continues to grow at a slower pace against loan (+5.9% YoY vs. +9.0% YoY). In turn, this caused industry’s loan-to-deposit ratio (LDR) to inch upwards to 82.1% (Aug: 81.8%) while system excess liquidity narrowed by 6.1% YoY (Aug: -6.3% YoY). The percentage of CASA and excess liquidity to total deposit base stood at 25.8% (Aug: 25.5%) and 17.9% (Aug: 18.2%) respectively.

Interest spread widens temporarily. As a result of the 25bpts hike in overnight policy rate (OPR) on 10 July, the interest spread between average lending rate (ALR) and 3-month fixed deposit rate (FDR) had widened to 1.60% (Aug: 1.57%) where the former increased to 4.72% (Aug: 4.69%) while the latter stayed flat at 3.12%. However, we expect this trend to be short-lived given stiff price-based competition in the market.

Maintain NEUTRAL on the sector. All in all, our NEUTRAL view on the sector remains unchanged. Currently, it still lacks re-rating catalysts given: (i) muted loans growth, (ii) inevitable compression in net interest margin (NIM), (iii) potential up-cycle in non-performing loans (NPL), and (iv) valuations of Malaysian banks are relatively rich at the moment. That said, we have selective OUTPERFORM calls within the sector: (i) MAYBANK (TP: RM11.20) for its attractive dividend yields of 5%-6% while (ii) PBBANK (TP: RM20.00), CIMB (TP: RM7.15) and AEONCR (TP: RM17.80) are premised on value. The remaining stocks under our coverage are MARKET PERFORMs (please refer to our peer comparison table at pg. 6).

Source: Kenanga