Annualised system loans growth improved to 6.6% YoY but still below expectations. March’s system loans growth continued to accelerate (+9.2% YoY vs. Feb: +8.8% YoY) on the back of stronger business (+9.3% YoY vs. Feb: +8.6% YoY) and household lending (+9.2% YoY vs. Feb: +9.0% YoY). However, on an annualised basis, it advanced by 6.6% YoY, coming in slightly below our expectation of 7%-8%. Essentially, the slower growth was caused by higher loan repayments (Ytd-15: +3.9% YoY), which outpaced the rise in loan disbursements (Ytd-15: +3.5% YoY).

Leading indicators remained weak; loan applications declined 4.0% YoY while approvals increased by a mere 1.7% YoY. Demand for business loans contracted 10.8% YoY (vs. Feb: -23.1% YoY) while household loans improved by 5.1% YoY (vs. Feb: -8.6% YoY). That said, total loan applications were still weak at -4.0% YoY (vs. Feb: -16.7% YoY). As for loan approvals, it increased by 1.7% YoY vs. February’s slight decline of 1.4% YoY.

Asset quality improved while LLC stayed below 100%. Net impaired loans (NIL) ratio showed improvement on a YoY and MoM basis, where it fell 7bpts and 4bpts, respectively, to 1.22%. However, loan loss coverage (LLC) stayed below the 100%-mark, despite improving 84bpts MoM (-5.8ppts YoY) to 98.7%; the slightly higher LLC can be attributed to a quicker decline in impaired loans (-1.4% MoM) vs. bad loan provisioning (-0.5% MoM).

System LDR improved 70bpts MoM; excess liquidity widened. System deposits grew at a faster clip in March (+9.0% YoY vs. Feb: +8.3% YoY). However, it was still a tad slower compared to system loans growth (+9.2% YoY vs. Feb: +8.8% YoY). That said, industry’s loan-to-deposit ratio (LDR) improved to 81.6% (Feb: 82.3%) while the system excess liquidity widened by 8.1% YoY (Feb: +5.9% YoY). The percentage of current account, savings accounts (CASA) and excess liquidity to total deposit base stood at 25.9% (Feb: 25.8%) and 19.1% (Feb: 18.2%), respectively.

Interest spread widened by 4bpts MoM. The interest spread between average lending rate (ALR) and 3-month fixed deposit rate (FDR) widened to 1.57% (Feb: 1.53%) as the former increased to 4.70% (Feb: 4.67%), while the latter was flat at 3.13% (Feb: 3.13%). Despite the temporary respite, we expect net interest margin (NIM) compression to resume given stiff price-based competition in the market.

Maintain NEUTRAL. We maintain our NEUTRAL view on the sector. Structural and cyclical headwinds such as: (i) muted loans growth, (ii) narrowing NIM, (iii) weak capital market activities, and (iv) higher credit costs are expected to be seen this year. Hence, we advocate caution and adopt a selective stock picking strategy; MAYBANK (TP: RM10.26) remains the sole OUTPERFORM under our coverage. Essentially, we like its: (i) superior yield offerings of ~6%, and (ii) extensive regional exposure in ASEAN-5. The remaining stocks under our coverage are MARKET PERFORMs (please refer to our peer comparison table at pg. 6).

Source: Kenanga Research - 5 May 2015