Industry statistics for May lacked oomph as: (i) system loans growth missed expectation, (ii) leading indicators were still weak, (iii) assets quality dipped, (iv) deposit-taking activities slowed down, and (v) interest spread contracted. All in all, we maintain our NEUTRAL stance on the sector as it lacks re-rating catalysts while structural and cyclical headwinds remained steadfast, showing no signs of respite. MAYBANK (TP: RM9.74) is the sole OUTPERFORM under our coverage, while AFFIN (TP: RM2.74) is an UNDERPERFORM and the others are MARKET PERFORMs.

Annualised system loans growth improved to 6.1% YoY but still below expectations. Stronger business lending (+9.1% YoY vs. April: +8.6% YoY) lifted May’s system loans growth (+8.9% YoY vs. April: +8.8%). However, the household segment saw a slight deceleration (+8.7% YoY vs. April: 8.9%). When annualised, industry loan grew by a quicker 6.1% YoY (vs. April: 5.0%) thanks to higher loan disbursements (Ytd-15: +1.5% YoY), which outpaced the rise in loan repayments (Ytd-15: +0.9% YoY). Nevertheless, it still fell short of our +7-8% expectation.

Leading indicators stayed weak; loan applications declined 2.9% YoY while approvals increased by a mere 0.6% YoY. Demand for loans had withered. In the business segment, it contracted 1% YoY (April: +3.5% YoY), while household loans saw a further decline of 4.9% YoY (April: -2.3% YoY). Overall, total loan applications fell 2.9% YoY (April: +0.7% YoY). As for loan approvals, it ticked up a mere 0.6% YoY vs. April’s decrease of 2.4%.

Assets quality dipped MoM while LLC stayed above 100%. Net impaired loans (NIL) ratio showed improvement on a YoY basis but moderated MoM, where it fell 7bpts and increased 3bpts, respectively, to 1.2%. Loan loss coverage (LLC) stayed above the 100% mark, despite falling 1.2ppts MoM (-4.3ppts YoY); the lower LLC can be attributed to a quicker rise in impaired loans (+2.8% MoM) vs. bad loan provisioning (+1.6% MoM).

System LDR increased 70bpts MoM; excess liquidity narrowed. System deposits grew at a weaker clip in May (+8.0% YoY vs. April: +8.3% YoY). When compared to system loans growth, it was still a tad slower (+8.9% YoY vs. April: +8.8%). Thus, this caused the industry’s loan-to-deposit ratio (LDR) to increase to 81.9% (April: 81.2%) while system excess liquidity saw its growth narrowed to 4.0% YoY (April: +6.2% YoY). The percentage of current account, savings accounts (CASA) and excess liquidity to total deposit base stood at 25.2% (April: 25.5%) and 18.1% (April: 18.8%), respectively.

Interest spread contracted 4bpts MoM. The interest spread between average lending rate (ALR) and 3-month fixed deposit rate (FDR) contracted to 1.59% (April: 1.63%) as the former fell to 4.61% (April: 4.65%), while the latter was flat at 3.02% (April: 3.02%). We expect this trend to continue as net interest margin (NIM) compression is inevitable given persistent 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 continue to plague the banking industry. Hence, we are still advocating caution and adopt a selective stock picking strategy; MAYBANK (TP: RM9.74) 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 other stocks under our coverage are MARKET PERFORMs, save for AFFIN (TP: RM2.74) which is an UNDERPERFORM (please refer to our peer comparison table at pg. 6).

Source: Kenanga Research - 1 July 2015