Industry statistics for July were mixed as illustrated by the following trends where (i) system loans growth was healthy but leading indicators were mixed, (ii) loan applications headed north but loan disbursements went south, (iii) assets quality improved slightly, (iii) deposit-taking activities slowed down, along with (iv) contracting interest spread. All in all, we maintain our NEUTRAL stance on the sector as it still lacks re-rating catalysts. MAYBANK (TP: RM9.74) is the only OUTPERFORM stock under our coverage. The rest are MARKET PERFORMs, save for AFFIN (TP: RM2.40) and MBSB (TP: RM1.76), where their ratings are still UNDERPERFORM.

Annualised system loans growth decelerated slightly to +7.1% YoY, coming in within expectations. As in the previous month yet again, July’s system loans growth was lifted by strong business lending (+10.5% YoY vs. Jun: +9.4% YoY) while the household segment inched higher as well (+8.8% YoY vs. June: +8.7%). When annualised, industry loans grew slightly less (+7.1% YoY vs. June: +7.2% YoY) on the back of higher disbursements (Ytd-15: +3.3%), which outpaced the increase in loan repayments (Ytd-15: +1.8%). Thus far, this is within our +7-8% growth expectation.

Leading indicators are mixed; loan applications ticked up 7.0% YoY while approvals declined slightly by 0.9% YoY. Demand for loans surged from the previous month where the household segment saw lending applications jumped by 6.7% YoY (June: +5.1% YoY), and business loans rebounded to 7.2% (June: -0.2% YoY). Overall, July’s total loan applications growth improved to 7.0% YoY (June: +2.4%). However, loan approvals declined by 0.9%YoY vs. June’s impressive growth of 15.1% YoY.

Assets quality improved MoM while LLC dipped further. Net impaired loans (NIL) improved slightly on a YoY and MoM basis where it fell by 4bpts and 1bpts, respectively, to 1.23%. Loan loss coverage (LLC) continued to dip further below the 100% mark (-2bpts MoM, -6.75ppts YoY) to 97.5%; this is because impaired loans rose 0.4% MoM while bad loans provisioning rose slightly 0.2% MoM.

System LDR increased 250bpts MoM; excess liquidity narrowed. System deposits grew at a slower clip in July (+4.5% YoY vs. June: +7.7% YoY). When compared to system loans growth, it remained at a weaker pace (+9.6 YoY vs. May: +9.1% YoY). In turn, this caused the industry’s loan-to-deposit ratio (LDR) to rise to 84.9% (June: 82.4%) while system excess liquidity saw its growth declining by 17.2% YoY (June: +1.6% YoY). The percentage of current account savings account (CASA) and excess liquidity to total deposit base stood at 25.5% (June: 25.8%) and 15.1% (June: 17.6%), respectively.

Interest spread contracted 2bpts MoM. The interest spread between average lending rate (ALR) and 3-month fixed deposit rate (FDR) contracted to 1.41% (June: 1.43%) as the former fell to 4.54% (June: 4.57%), while the latter was flat at 3.14% (June: 3.14%). We expect this trend to continue as net interest margin (NIM) compression is inevitable given the 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) is the only OUTPERFORM stock under our coverage. We like Maybank for its superior yield offerings of ~6%. The other stocks under our coverage are MARKET PERFORMs, save for AFFIN (TP: RM2.40) and MBSB (TP: RM1.76), where their ratings are UNDERPERFORM (please refer to our peer comparison table at pg. 6). 

Source: Kenanga Research - 2 Sep 2015