In February, loans growth slightly accelerated and asset quality recorded an improvement on a YoY basis. However, early indicators suggest that tougher times lie ahead with loans application and approvals having fallen in February and asset quality deteriorating MoM. Considering also the lack of re-rating catalysts, we continue to keep NEUTRAL on the sector. That said, we still like MAYBANK (TP: RM10.26) for its decent dividend yields while other banking stocks under our coverage are rated as MARKET PERFORM.

Annualised system loans growth of 4.4% YoY still lagging expectations. February’s system loans growth accelerated very slightly (+8.8% YoY vs. Jan: 8.6% YoY) echoing the acceleration in household loans growth (+9.0% YoY vs. Jan: 8.7% YoY) while business loans growth (+8.6% YoY vs. Jan: 8.6% YoY) stayed flat. The marginal step-up in growth was also reflected in the annualised advancement in industry loans which came in slightly higher at 4.4% YoY (vs. Jan: 4.1% YoY). Nevertheless, it continued to fall short of our 2015 loans growth expectation of 7-8%; the continuation of which could pose a downside risk to our forecasts. In the meantime, we leave our forecast unchanged on an expectation of a pick up in working capital financing (10.4% YoY vs. Jan: 8.2% YoY) from the business segment later this year (usually lumpy in nature).

Slower loans growth ahead as loan applications and approvals down by 0.8-17.1% YoY. Leading indicators suggest weakness ahead with loan applications having dropped by a hefty 17.1% YoY (vs. Jan: +10.0% YoY) as both the demand for business loans (-22.5% YoY vs. Jan: +7.8% YoY) and household loans (-10.2% YoY vs. Jan: +12.2% YoY) declined. Loan approvals were also lower, albeit by a much less severe 0.8% YoY (vs. Jan: +9.3% YoY).

Asset quality better but showing sequential deterioration, while coverage slipped further below 100%. In terms of asset quality, it was better on a YoY basis as the industry net impaired loans ratio (NIL) fell 4bpts to 1.26% (Jan: - 9bpts to 1.21%). However, it showed sequential deterioration, ticking upwards by 5bpts MoM (Jan: +1bpts MoM) brought about by an increase in impaired loans from households (+4.2% MoM vs Jan: -1.1% MoM). Coverage, on the other hand, saw declines both on a YoY and MoM basis, slipping further below the 100%-mark to a lower 97.9% (Jan: 99.9%). The declines were larger than those reported in Jan (YoY: -6.6ppts vs. Jan: -4.1ppts; MoM: - 2.1% vs Jan: -1.1%) with the acceleration on a YoY basis caused by a bigger fall in loan loss provisioning (LLP) (-7.6% YoY vs Jan: -5.9% YoY) while on the MoM basis, there was a decline in LLP (-1.0% MoM) compared to a slight gain just a month earlier (Jan: +0.2%% MoM).

Smaller increase in system LDR to 81.8%; CASA lower. System deposits grew at a faster clip in February (+8.3% YoY vs. Jan: +7.9% YoY), nearly matching that of loans’ +8.8% YoY (Jan: 8.6% YoY). Relatively weaker than the annualised growth of loans, total deposits grew 3.1% (Jan: 1.9%) on an annualised basis. As a result, the increase in the industry loan-to-deposit ratio (LDR) decelerated to 40bpts (vs. Jan: +56bpts YoY), as LDR edged slightly higher to 81.8% and system excess liquidity stood at 18.2% (Feb 2014: 18.6%; Jan 2015: 18.2%). Meanwhile, the percentage of current and savings account deposits (CASA) continued to record a fall, settling in at a lower 25.8% in Feb (-90bpts YoY vs. Jan: -56bpts to 25.6%).

Interest spread widened by 2bpts MoM. The interest spread between the average lending rate (ALR) and 3-month fixed deposit rate (FDR) widened by 2bpts MoM in February to 1.53% (Jan: 1.51%), where the 3bpts MoM contraction in January ALR was reversed by a 3bpts MoM gain this month. Notwithstanding this, the gain is likely to be short-lived considering the weaker demand for loans.

Maintain NEUTRAL. All in, we maintain NEUTRAL 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 to adopt a selective stock picking strategy. In this regards, we continue to like MAYBANK (TP: RM10.26), keeping our OUTPERFORM call on the counter given its decent dividend yield offering of 5%-6%. The remaining stocks under our coverage are MARKET PERFORM (please refer to our peer comparison table at pg. 6).

Source: Kenanga