While the hike in the overnight policy rate provided a breather to banks, the shortlived gains are beginning to reverse themselves into long-term pains as loans growth came in flat in Oct 2014. Leading indicators suggest that loans growth could resume its deceleration in the coming months, predominantly due to a drop in applications for the purchase of residential properties. On the upside, improvement in asset quality was sustained. Excess liquidity continued to shrink with loan-todeposit ratio climbing to 82.0%. Meanwhile, interest spread narrowed as average lending rates inched down. All considered, we maintain NEUTRAL on the Banking Sector, without any re-rating catalysts in sight. That said, we have selective OUTPERFORM calls on: (i) AEONCR (TP: RM17.80), (ii) BIMB (TP: RM4.86), (iii) CIMB (TP: RM6.83), (iv) MAYBANK (TP: RM11.20), and (v) PBBANK (TP: RM20.00), while others stocks under our coverage are kept at MARKET PERFORM.
Annualised loans growth kept slightly below expectations. While the hike in the overnight policy rate provided a breather to banks, the longer term pains are starting to settle in with system loans growth coming in flat (+9.0% YoY vs. Sep: +9.0% YoY) in October 2014. Contribution from the business segment inched up (+9.0% YoY vs. Sep: +8.8% YoY), while household loans stayed unchanged at 9.1% YoY. On an annualised basis, this brings industry loans growth to 8.7% YoY, which still remains slightly below our expectation of +9-10% YoY for 2014.
Fall in applications from the household segment suggests resumption in the deceleration of loans growth. Total applications declined by 4.3% YoY in Oct (vs. Sep: +6.7% YoY), as demand for business loans decelerated to 8.6% YoY (vs. Sep: +12% YoY), while for household loans, it fell 15.9% YoY (vs. Sep: +0.6% YoY). This suggests resumption in the deceleration of loans growth in the coming months. The poor showing from the household segment was caused by a large decline in loan applications for the purchase of residential properties (-22.2% YoY). As for loan approvals, growth was at a higher 13.1% YoY (Sep: +12.1% YoY), mostly supported by a large expansion in loans approved for working capital (+60.4% YoY).
Asset quality continued to improve in Oct 2014. On the upside, improvement in asset quality was sustained with the industry’s gross impaired loans (GIL) ratio declining 21bps YoY to 1.75% while loan loss coverage (LLC) stayed above the 100%-mark. Improvements were also seen on a MoM basis, with GIL falling 3bps while LLC gained 2bps.
System LDR inched higher, excess liquidity shrinking. System deposits continued to grow at a slower pace against loans (+6.5% YoY vs. +9.0% YoY). As a result, industry’s loan-to-deposit ratio (LDR) inched upwards to 82.0% (Sep: 80.1%), while system excess liquidity shrunk by 3.7% YoY (Sep: -6.1% YoY) to RM288.3b as at Oct 2014. Meanwhile, the percentage of CASA to total deposits (25.2% vs. Sep: 25.8%) and excess liquidity to total deposits (18.0% vs. Sep: 17.9%) were little changed.
Interest spread narrowed as ALR moved up. As anticipated, the interest spread between the average lending rate (ALR) and 3-month fixed deposit rate (FDR) came back down to 1.55% (Sep: 1.60%) as the former fell back to 4.67% (Sep: 4.72%) while the latter remained at 3.12%.
Maintain NEUTRAL on the sector. All things considered, we keep our recommendation on the Banking Sector at NEUTRAL premised on our expectation of: (i) muted loans growth, (ii) thinner margins, and (iii) a potential up-cycle in non-performing loans (NPL). We also believe that the valuations of Malaysian banks are relatively rich at the moment. That said, we have selective OUTPERFORM calls within the sector on: (i) BIMB (TP: RM4.86), and (ii) MAYBANK (TP: RM11.20) for their attractive dividend yields of 4%-6% while (iii) AEONCR (TP: RM17.80), (iv) CIMB (TP: RM6.83), and (v) PBBANK (TP: RM20.00) 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
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