Industry statistics for November were mostly positive: (i) system loans growth accelerated, (ii) asset quality improved and (iii) deposit-taking activities picked up. However, loan applications were tepid and we observed narrowing interest spread due to stiff price-based competition in the market. All in all, we maintain our NEUTRAL view on the sector as it lacks re-rating catalysts. That said, we have selective OUTPERFORM calls on: (i) BIMB (TP: RM4.72), (ii) CIMB (TP: RM6.27), (iii) MAYBANK (TP: RM10.13) and (iv) PBBANK (TP: RM18.89), while others are MARKET PERFORM.

Slight improvement in system loans; within expectations. November’s system loans growth showed some improvement (+9.3% YoY vs. Oct: +9.0% YoY). This was again led by the business segment (+9.7% YoY vs. Oct: +8.9% YoY). On the other hand, household loans continued to be tepid (+8.9% YoY vs. Oct: +9.1% YoY). When annualized, industry loans grew by 8.4% YoY, coming in within our expectation of +8%-9% for 2014. As for 2015, we expect industry loans growth to taper to +7%-8% on the back of: (i) soft business loans given that the Government intends to trim the country’s fiscal deficit to 3% of GDP – hence, pump priming activities are likely to be weak and (ii) the household segment is anticipated to slow down due to rising inflationary environment coupled with higher interest rates.

Industry loan applications flat, loan approvals slowed down. No change in trend. Demand for business loans were robust, accelerating by 14.9% YoY (vs. Oct: +8.2% YoY), while household loans were lethargic, declining by 15.3% YoY (vs. Oct: -15.9% YoY). Notably, application for the purchase of residential (-27.2% YoY) and nonresidential (-7.4% YoY) property loans were weak. Overall, demand for loans were flat (+0.1% YoY vs. Oct: -4.4% YoY). As for loan approvals, it increased by 10.8%, slower than October’s growth (+13.1% YoY).

Asset quality improved. On a YoY basis, net impaired loans ratio (NIL) dropped 10bpts to 1.26%, while loan loss coverage (LLC) remained above the 100%-mark. On a MoM basis, NIL declined by 2bpts, while LLC ticked down 54bpts. This was primarily thanks to the fall in non-performing loan (NPL) under the working capital category (-18.8% YoY, -4.0% MoM).

System LDR relatively flat, excess liquidity widened. System deposits grew a quicker pace in November (+7.8% YoY vs. Oct: +6.5% YoY). However, it is still slower compared to system loans growth (+9.3% YoY vs. Oct: +9.0% YoY). In turn, industry’s loan-to-deposit ratio (LDR) scaled back slightly to 81.8% (Oct: 82.0%), while system excess liquidity widened by 1.4% YoY (Oct: -3.7% YoY). The percentage of current account, savings accounts (CASA) and excess liquidity to total deposit base stood at 25.0% (Oct: 25.2%) and 18.2% (Oct: 18.0%) respectively.

Interest spread narrowed. The interest spread between average lending rate (ALR) and 3-month fixed deposit rate (FDR) narrowed to 1.52% (Oct: 1.55%), where the former declined to 4.65% (Oct: 4.67%), while the latter ticked up to 3.13% (Oct: 3.12%). This indicates that stiff price-based competition continues to plague the market, showing no sign of respite.

Maintain NEUTRAL. No change to our NEUTRAL view on the sector. Structural and cyclical headwinds such as: (i) muted loans growth, (ii) narrowing net interest margin, (iii) weak capital market activities, and (iv) higher credit costs are expected to be seen in 2015. That said, we see pocket of opportunities for stock picking among banks, which share prices got bashed down severely. For this, we like CIMB (OP; TP: RM6.27). Other OUTPERFORM recommendations are BIMB (TP: RM4.72), MAYBANK (TP: RM10.13), and PBBANK (TP: RM18.89); we like the first two for their decent yield offerings of 4%-6% while the third is for its defensive qualities. The remaining stocks under our coverage are MARKET PERFORM (please refer to our peer comparison table at pg. 6).

Source: Kenanga