Money supply growth improved slightly in September in the latest sign that monetary conditions may be stabilising after months of deterioration from the unrelenting flow of portfolio capital out of Malaysia and other emerging markets. Broad money or M3 grew 5.3% YoY in September, outpacing 4.6% in August. As in the previous month, loan growth was stable and even performed better-than-expected with growth of 9.7% YoY. Deposit growth continued to be adversely affected by volatile financial markets and remained insufficient to keep up with loan growth. As such, the loan-to-deposit ratio remained near a 15-year high of 90.1% and ever closer to the point of liquidity stress. We continue to expect monetary conditions to reflect moderating economic growth and tight lending conditions. Relatively low banking system liquidity will keep loan growth in check over the next few months averaging between 8.0% - 9.0% for 2015.

• Broad money or M3 grew 5.3% YoY in September, beating the 4.6% growth in August as the decline in Net Foreign Assets appeared to have slowed to 0.2% YoY. On a MoM basis, M3 gained 1.3%.
• September saw the M3 category of Net Claims on Government grow 5.9% YoY after three months of contraction while Claims on the Private Sector improved, up 9.2% YoY, only slightly slower than the previous month.
• Narrow money supply or M1 growth moderated from a strong rebound in August. It grew 8.3% YoY in September compared to 8.8% in August
• Loan growth again exceeded expectations with a September expansion of 9.7% YoY, slower than the 10.2% recorded in August but otherwise better than the year-to-date average of 9.2%
• According to Bank Negara, net financing to the private sector slowed to 8.8% YoY in September from 9.2% in August, driven by stable growth in net outstanding issuances of private debt securities (PDS) amidst a moderation in the growth of banking system loans.
• More loans were made out to businesses than households. Outstanding business loans grew at a much faster rate of 11.0 % YoY compared to 8.1% YoY for outstanding household loans, which has been on a moderating growth trend following the introduction of property-cooling measures in 2013.
• Deposit growth edged up 1.3% MoM and 5.4% YoY from 0.2% MoM and 5.1% YoY in August, again insufficient to keep up with loan growth.
• One cause of weak deposit growth was a high value of withdrawals from fixed deposit and investment accounts influenced by the rapid depreciation of the ringgit.
• The gap between system-wide loan growth and deposit growth narrowed slightly in September after reaching a 15-year high in August. Consequently the loan-to-deposit ratio in September was slightly lower at 90.1% compared to 90.4% in August

Source: Kenanga Research - 2 Nov 2015