Industry statistics for January failed to inspire as system loans growth decelerated and interest spread continued to narrow due to stiff price-based competition in the market. Nevertheless, asset quality improved and deposit-taking activities picked up. All in, we maintain our NEUTRAL stance on the sector as it lacks re-rating catalysts – structural and cyclical headwinds remain undeterred, showing no signs of respite. That said, we have selective OUTPERFORM calls on BIMB (TP: RM4.72) and MAYBANK (TP: RM10.26), while others are MARKET PERFORM.

Annualised system loans growth decelerated to 4.1% YoY; below expectations. January’s system loans growth decelerated (8.6% YoY vs. Dec: 9.3% YoY). This was primary due to a subdued take-up for loans in the business segment (8.6% YoY vs. Dec: 9.7% YoY). On the other hand, household loans grew a tad slower as well (8.7% YoY vs. Dec: 8.9% YoY). When annualised, industry loans advanced only a mere 4.1% YoY, coming in below our expectation of 7%-8% for 2015; this was surprising given that we have already factored in tepid growth on the back of: (i) soft business loans as the Government intends to trim the country’s fiscal deficit to 3.2% of GDP, and (ii) the household segment is anticipated to slow down due to rising inflationary environment. That said, however, we maintain our system loans growth target of 7-8% for now, as we expect working capital financing (8.2% YoY vs. Dec: 9.3% YoY) from the business segment to pick up a slight pace later this year – note that this is usually lumpy in nature. 

Leading indicators still robust; loan applications and approvals up by 9-10% YoY. Demand for business loans was intact at 7.8% YoY (vs. Dec: 7.7% YoY) while for household loans, it jumped 12.2% YoY (vs. Dec: 2.2% YoY). Overall, application for loans accelerated by 10.0% YoY (vs. Dec: 4.8% YoY). As for loan approvals, it increased by 9.3%, quicker than December’s growth of 2.0% YoY. 

Asset quality improved. On a YoY basis, net impaired loans ratio (NIL) fell 11bpts to 1.19%, while loan loss coverage (LLC) stayed above the 100%-mark. On a MoM basis, it also showed an improvement where NIL declined by 3bpts and LLC ticked up by 1.7ppts; the higher LLC can be attributed to higher bad loan provisioning (3.0% MoM) and lesser impaired loans were booked from the household segment (-1.1% MoM). 

System LDR flat at 81.8%; excess liquidity widened. System deposits grew at a faster clip in January (7.9% YoY vs. Dec: 7.6% YoY). However, it was still slower compared to system loans growth (8.6% YoY vs. Dec: 9.3% YoY). That said, industry’s loan-to-deposit ratio (LDR) remained flat at 81.8% (Dec: 81.6%) but system excess liquidity widened by 4.7% YoY (Dec: 0.8% YoY). The percentage of current account, savings accounts (CASA) and excess liquidity to total deposit base stood at 25.6% (Dec: 25.6%) and 18.2% (Dec: 18.4%), respectively. 

Interest spread narrowed by 3bpts MoM. The interest spread between average lending rate (ALR) and 3-month fixed deposit rate (FDR) narrowed to 1.51% (Dec: 1.54%), where the former declined to 4.64% (Dec: 4.67%), while the latter was flat at 3.13% (Dec: 3.13%). This depicts that stiff price-based competition continues to plague the market, showing no sign of respite. 

Maintain NEUTRAL. We maintain 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 this year. Hence, we advocate caution and adopt a selective stock picking strategy. We have OUTPERFORM recommendations on BIMB (TP: RM4.72) and MAYBANK (TP: RM10.26). Essentially, we like the two stocks for their decent yield offerings of 5%-6%. The remaining stocks under our coverage are MARKET PERFORM (please refer to our peer comparison table at pg. 6).

Source: Kenanga