In April, loans continued to grow, albeit at a decelerated rate, and asset quality recorded sequential improvement restoring coverage above 100%. However, early indicators remain weak with loans applications inclining only marginally and approvals falling. Considering also the lack of re-rating catalysts, we remain NEUTRAL on the sector and advocate a selective approach to stock picking with MAYBANK (TP: RM9.74) as our only OUTPERFORM call given its decent dividend yield and extensive regional exposure in ASEAN-5.

Annualised system loans growth contracted 5.0% YoY, further lagging expectation. April’s system loans growth decelerated (+8.8% YoY vs. Mar: +9.2% YoY) echoing the slower growth recorded both in household lending (+8.9% YoY vs. Mar: +9.2% YoY) as well as business lending (+8.6% YoY vs. Mar: +9.3% YoY). As such, annualised loans growth grew by a smaller 5.0% YoY (vs. Mar: +6.6%), further lagging our 7-8% loans growth expectation (2014: +9.3%), as the margin of growth between repayments (YTD-Apr: +1.3% YoY vs. YTD-Mar: +4.0%) and disbursements (YTD-Apr: +0.7% YoY vs. YTD-Mar: +3.5%) widened to 65bpts (Mar: 47bpts).

Leading indicators remained weak; marginal growth recorded in applications while approvals fell. Leading indicators remained weak, with loan applications only managing a marginal gain in April (+0.7% YoY vs. Mar: -4.0% YoY) given that the improved demand for business loans (+3.5% YoY vs. Mar: -10.8% YoY) was mostly offset by a retracement in loan demand from households (-2.3% YoY vs. Mar: +5.1% YoY). Loan approvals, on the other hand, declined (-2.4% YoY vs. Mar: +1.7% YoY).

Sequential improvement in asset quality restored coverage above 100%. In terms of asset quality, it continued to record an improvement with the industry’s net impaired loans ratio falling 5bpts MoM and 9bpts YoY, respectively, to 1.17% (Mar: -3bpts MoM, -7bpts YoY) thanks to total impaired loans having retreated 4.2%MoM and 5.2%YoY (Mar: - 1.5% MoM, -2.4% YoY). Consequently, coverage further recovered +3.0% MoM (Mar: +1.0% MoM) to register above the 100%-mark. Nevertheless, compared to April 2014, coverage was still lower by 3.0% (Mar: -5.4% YoY).

LDR edged up from Mar; while CASA-deposit ratio reverted to a decline. System deposits declined 0.3% MoM in April (Mar: +2.0% MoM) while loans was mostly flat on a sequential basis (Mar: +0.9% MoM). As such, loan-to-deposit ratio (LDR) edged up 28bpts MoM (Mar: -89bpts MoM) to 81.2%, also representing growth on a YoY basis of 37bpts (Mar: +17bpts YoY). Conversely, system excess liquidity was sequentially and YoY lower at 18.8% (-37bpts MoM, - 28bpts YoY vs. Mar: -17bpts MoM, +89bpts YoY). Meanwhile, the percentage of current and savings account (CASA) to deposits (CASA) reverted to decline, settling in at a lower 25.5% in Apr (-39bpts MoM, -70bpts YoY vs. Mar: +5bpts MoM, -45bpts YoY).

Interest spread retraced 6bpts MoM erasing gains in Feb and Mar. The interest spread between the average lending rate (ALR) and 3-month fixed deposit rate (FDR) contracted by 6bpts MoM in April to 1.63%, erasing gains in Feb (+3bpts MoM) and March (+3bpts MoM) as price-based competition begin to set in with the ALR losing 6bpts MoM to 4.65% (Mar: +3bpts MoM) despite the FDR holding steady at 3.20% (Mar: flat MoM).

Reiterate NEUTRAL. In a nutshell, April produced a set of positives mixed in with some negatives. Hence, our NEUTRAL stance on the banking sector stays without any re-rating catalyst in sight. In fact, we remain cautious as the sector faces 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. In view of these considerations, we continue to advocate caution in stock picking with MAYBANK (TP: RM9.74) as the only counter with an OUTPERFORM call given its: (i) superior yield offerings of ~6%, and (ii) extensive regional exposure in ASEAN-5. The remaining stocks under our coverage are MARKET PERFORMs except for AFFIN (TP: RM2.74) for which we have an UNDERPERFORM call in view of a surge in loan loss provisioning incurred in 1Q15 which may impact its ability to achieve its FY15 aspirations (please refer to our peer comparison table at pg. 6).

Source: Kenanga Research - 1 Jun 2015