2014 loans growth was more subdued compared to a year ago, and the deceleration is expected to continue as  contractionary fiscal and monetary policies begin to exert pressure on the system. Hence, our loans growth forecast for 2015 is a lower 7-8%. Leading indicators suggest that 2015 will see the business segment in the driver’s seat, as the
consumer segmentbegins to shy away from the limelight. On a positive note, asset quality continued to improve and reserve coverage also has been beefed up. All in, we keep the sector at NEUTRAL for want of re-rating catalysts. Nevertheless, we have selective OUTPERFORM calls on: (i) BIMB (TP: RM4.72), (ii) MAYBANK (TP: RM10.13) (iii) PBBANK (TP: RM18.89), and (iv) RHBCAP (TP: RM9.35), whilst holding the other banks under our coverage at MARKET PERFORMs. Top Pick for the sector is MAYBANK.

2014 loans growth of 8.7% within expectation. 2014 loans growth ended the year within expectation; coming in at the higher end of our 8-9% loans growth estimates at 8.7% YoY (end-2013: +10.6% YoY). Both the business and consumer segments inclined at a similar pace, with the former just slightly leading at 8.8% YoY (end-2013: +11.1% YoY) and the latter registering a growth of 8.7% YoY (end-2013: +10.2% YoY).

Slight tapering in 2015 loans growth expectation to 7-8%. As for 2015, system loans attributable to both the business and consumer segments are expected to soften as fiscal policies turn contractionary (subsidy rationalisation and the introduction of the goods and services tax) in an effort to trim the fiscal deficit to 3% of gross domestic product. Additionally, tighter monetary policies (higher interest rates) could discourage spending. Hence, we believe that industry loans growth will taper to 7-8%.

Leading indicators suggests that the business segment will be the growth driver in 2015. Total loans applied for in 2014 inched up 1.0% YoY (2013: +6.3% YoY) to RM828.3b, driven by the business segment, which advanced 7.4% YoY (2013: -1.2% YoY) to RM448.9b. Meanwhile, a 5.8% YoY fall (2013: +15.4% YoY) in household loan applications to RM379.5b put a cap on growth in industry loans demand. Similarly, total loan approvals was up by a smallish 2.3% YoY (2013: +0.4% YoY) to RM401.5b on the back of a 5.1% YoY (2013: -12.4% YoY) in business loans approval to RM202.2b. Consumer loan approvals, on the other hand, fell 0.4% YoY (2013: +16.7% YoY) to RM199.3b. This suggests that the driver of loans growth moving into 2015 could be the business segment.

Continued improvement in asset quality and coverage. On a positive note, the year ended with improved asset quality as system net impaired loans ratio recorded a 7bpts YoY drop to 1.23% (end-2013: -6bpts YoY). Meanwhile, coverage remained sufficient with industry loan loss coverage (LLC) ratio staying above the 100%- mark, coming in 5.1ppts YoY higher at 106.3% (end-2013: +2.5ppts YoY).

System LDR relatively flat, excess liquidity widened. Deposits grew at a slower 7.6% YoY (end-2013: +8.3% YoY) compared to loans that expanded +8.7% YoY (end-2013: +10.6% YoY). Hence, system excess liquidity was lower by 0.8ppts YoY to 18.8% (end-2013: -1.7ppts YoY) as industry loan-deposit ratio increased 83bpts YoY to 81.2% at end-2014 (end-2013: +1.7% YoY). The percentage of current account and savings accounts deposits (CASA) to total deposits shrunk 90bpts YoY (end-2013: +57bpts YoY) to 25.6%. As such, the competition for deposits is expected to continue.

Interest spread narrowed. In terms of rates, both the average lending rate (ALR) and the 3-month fixed deposit rate (FDR) reported growths following the 25bpts increase in the overnight policy rate on 10 Jul 2014 to 3.25%. However, the former grew by a smaller 10bpts YoY to 4.67% (2013: -14bpts YoY) compared to the latter which inclined 16bpts YoY to 3.13% (2013: flat YoY), reflecting the stiff price based competition for loans and deposits. As a result, the spread between the ALR and FDR retraced 5bpts YoY to 1.54% (end-2013: -14bpts YoY). 

Source: Kenanga