Industry statistics for August were clear for the coming months ahead with the following trends where: (i) despite system loans growth healthy leading indicators showed slowing down ahead (ii) loan applications eased and loan disbursements went further south, (iii) assets quality improved slightly, (iii) deposit-taking activities still lower than loans, 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) and RHBCAP (TP: 7.07) are the OUTPERFORM stocks 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 accelerated further in August to +8.2% YoY, as it has been since May, August’s system loans growth was lifted by strong business lending (+11.8% YoY vs. July: +10.5% YoY) while the household segment grew slower (+8.7% YoY vs. July: +8.8%). When annualised, industry loans accelerated (+8.2% YoY vs. July: +7.2% YoY) on the back of higher disbursements (YTD-2015: +2.5%), which outpaced the increase in loan repayments (YTD-2015: +1.1%). Thus far, the industry loan growth is within our 7%-8% growth expectations.

Leading indicators showed muted loan growth ahead; loan applications decelerated to +3.1%% YoY (Jul: +7.0% YoY) while approvals declined significantly by 9.1% YoY (Jul: -0.9% YoY). Demand for loans were sluggish from the previous month where the household segment saw lending applications growth eased to +6.0% YoY (Jul: +6.7% YoY) and business segment was lackadaisical to only +0.7% growth YoY (Jul: +7.0% YoY). Overall, August’s total loan applications growth eased to +3.1% YoY (Jul: +7.0%). However, loan approvals declined significantly by 9.1%YoY vs. July’s fall of 0.9% YoY.

Assets quality and LLC improved MoM. Net impaired loans (NIL) improved slightly on a YoY where it fell by 3bpts whilst on a MoM basis it was flat at 1.23%. Loan loss coverage (LLC) stayed below the 100% mark (+24bpts MoM, - 7.21ppts YoY) to 97.55% (Jul: 97.31%); this is because impaired loans rose 0.2% MoM while bad loans provisioning rose slightly 0.4% MoM.

System LDR increased 91bpts MoM; excess liquidity narrowed further. System deposits grew at a faster clip in August (+5.1% YoY vs. July: +4.5% YoY). When compared to system loans growth, it remained at a weaker pace (+11.8 YoY vs. July: +10.5% YoY). In turn, this caused the industry’s loan-to-deposit ratio (LDR) to rise to 85.84% (July: 84.92%) while the system excess liquidity saw its growth declining further by 18.0% YoY (July: -17.26% YoY). The percentage of current account savings account (CASA) and excess liquidity to total deposit base stood at 25.7% (July: 25.5%) and 14.2% (July: 15.1%), respectively.

Interest spread contracted 3bpts MoM. The interest spread between average lending rate (ALR) and 3-month fixed deposit rate (FDR) contracted to 1.37% (July: 1.41%) as the former fell to 4.51% (July: 4.54%), while the latter was flat at 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 in 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 RHBCAP (TP: 7.07) are the OUTPERFORM stocks under our coverage. We like Maybank for its superior yield offerings of ~6% while we see deep value for RHBCAP with its fwd PB at merely 0.8x compared to the industry’s fwd PB of 1.5x. 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. 7). 

Source: Kenanga Research - 1 Oct 2015