Broad money growth slowed in May for the second consecutive month on capital outflows and rising government deposits. Growth in M3 and M2 moderated to 5.7% YoY and 6.2% YoY respectively. Narrow money growth, on the other hand, improved slightly in May, by 0.4% MoM, after falling 8.4% MoM in April, pushing up YoY growth to 8.7% from 8.1% previously suggesting a small improvement in household spending post-GST implementation. System-wide loan growth edged higher in May to 8.9% YoY while deposit growth slowed to 8.0% YoY. The wide gap between loan and deposit growth rates means that the loan-to-deposit ratio in May, at 87.7, is the highest since 1999. We continue to expect tight lending conditions, moderating economic growth and consumer pessimism to weigh on loan growth in 2015 and reiterate our forecast for average loan growth of 7.0% - 8.0% in 2015, below the 8.7% seen in 2014.

• Broad money growth in May slowed for a second consecutive month from the last peak in March. The broadest money supply, M3, expanded 5.7% YoY, below 6.5% in April on capital outflows and rising government deposits. Growth in the similar measure of M2 also slowed, to 6.2% YoY from 7.0% in the previous month.  Narrow money growth, on the other hand, edged up slightly in May after a sharp fall in April on a pullback in consumer spending post-GST implementation. M1, which best tracks consumer spending patterns, expanded 8.7% YoY, slightly higher than 8.1% in April but still well below the last peak of 10.2% in March.
• A closer look at the components of M3 showed that total net foreign assets fell 5.0% YoY and 0.9% MoM in May. Net claims on government recorded a small 2.5% YoY expansion on fast rising government deposits while growth in net claims on the private sector was stable at 8.6%.
• Loan growth improved slightly in May to 8.9% YoY from 8.8% in the previous month. The year-to-date average stands at 8.9% YoY compared to 9.7% for the same period in 2014 suggesting a general downward trend for system-wide loan growth. Macro-prudential measures introduced in 2013 and the resulting tighter lending conditions have kept a lid on growth in housing and consumer loans and will continue to do so in the coming months. Deposit growth, on the other hand slowed to 8.0% from 8.3% in April. This might be due to banks’ action to meet Basel III requirements.
• The gap between system-wide loan growth and deposit growth widened in May taking the loan-to-deposit ratio to 87.7, the highest since 1999.
• According to Bank Negara, Net financing to the private sector grew by 8.3% in May, driven by higher growth of both outstanding banking system loans and net outstanding issuances of private debt securities (PDS). Outstanding business loans registered a higher annual growth rate, with a larger volume of loans disbursed mainly to the finance, insurance and business services; agriculture; real estate; and electricity, gas and water supply sectors during the month. The annual growth in outstanding household loans continued to moderate.

Outlook

• Money and credit conditions in the second month of GST are consistent with expectations if not slightly better than earlier anticipated suggesting that transition to the new tax system has been largely unproblematic. For the remainder of the year, liquidity concerns will keep loans growth in check as we observe that the loan-to-deposit ratio, which has been rising steadily since 2013, is now at the highest since 1999.
• Loans growth will continue to creep lower unless there is a change of monetary policy or the lifting of macro-prudential cooling measures, both of which are unlikely to happen this year. Along with moderating economic growth and consumer pessimism our forecast is for the banking system loans growth to average between 7.0% and 8.0% in 2015 compared to 8.7% in 2014.

Source: Kenanga Research - 1 Jul 2015