Industry statistics for June still lacked the desired ‘kick’ as: (i) system loans growth and leading indicators were still essentially weak, (ii) assets quality moderated, (iii) deposittaking activities slowed down, along with (iv) contracting interest spread. All in all, we maintain our NEUTRAL stance on the sector as it lacks re-rating catalysts. MAYBANK (TP: RM9.74) and CIMB (TP: RM5.96) are the two OUTPERFORM stocks under our coverage. The rest are MARKET PERFORMs, save for AFFIN (TP: RM2.74) and AMBANK (TP: RM6.48), where their ratings are kept under review.

Annualised system loans growth accelerated to +7.2% YoY, coming in within expectations. Yet again, June’s system loans growth was lifted by strong business lending (+9.4% YoY vs. May: +9.1% YoY) while the household segment held up pretty well (+8.7% YoY vs. May: +8.7%). When annualised, industry loans grew a tad faster (+7.2% YoY vs. May: +6.1% YoY) on the back of higher disbursements (Ytd-15: +3.4%), which outpaced the increase in loan repayments (Ytd-15: +2.8%). Thus far, this is within our +7-8% expectation.

Leading indicators still uninspiring; loan applications ticked up 2.4% YoY while approvals surged 15.1% YoY. Demand for loans remained uninspiring. Although the household segment saw lending applications jumped 5.1% YoY (May: -4.9% YoY), business loans dwindled by 0.2% (MaY: -1.0% YoY). Overall, June’s total loan applications ticked up a mere 2.4% YoY (May: -2.9%). On the other hand, loan approvals surged 15.1% YoY vs. May’s flattish growth of 0.6% YoY.

Assets quality moderated MoM while LLC dipped below 100%. Net impaired loans (NIL) improved slightly on a YoY basis but continued to moderate MoM, where it fell 2bpts and increased 4bpts, respectively to 1.24%. Loan loss coverage (LLC) dipped below the 100% mark (-3.1ppts MoM, -7.5ppts YoY); this is because impaired loans rose 2.7% MoM while bad loans provisioning declined 0.5% MoM.

System LDR increased 50bpts MoM; excess liquidity narrowed. System deposits grew at a slower clip in June (+7.7% YoY vs. May: +8.0% YoY). When compared to system loans growth, it remained at a weaker pace (+9.1 YoY vs. May: +8.9% YoY). In turn, this caused the industry’s loan-to-deposit ratio (LDR) to rise to 82.4% (May: 81.9%) while system excess liquidity saw its growth shrunk to 1.6% YoY (May: +4.0% YoY). The percentage of current account savings account (CASA) and excess liquidity to total deposit base stood at 25.8% (May: 25.2%) and 17.6% (May: 18.1%), respectively.

Interest spread contracted 4bpts MoM. The interest spread between average lending rate (ALR) and 3-month fixed deposit rate (FDR) contracted to 1.43% (May: 1.47%) as the former fell to 4.57% (May: 4.61%), while the latter was flat at 3.14% (May: 3.14%). 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. No change to our view as we maintain our NEUTRAL call 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) and CIMB (TP: RM5.96) are the two OUTPERFORM stocks under our coverage. Essentially, we like the former for its superior yield offerings of ~6% and the latter for its inexpensive valuation. The other stocks under our coverage are MARKET PERFORMs, save for AFFIN (TP: RM2.74) and AMBANK (TP: RM6.48), where their ratings are kept under review (please refer to our peer comparison table at pg. 6).

Source: Kenanga Research - 3 Aug 2015