Industry statistics for October are giving signals for the coming months with the following trends where: (i) system loans growth are slowing but leading indicators showing improvements ahead, (ii) loan applications and approvals are trending north, (iii) assets quality improved, and (iv) deposit-taking activities still slower than loans. 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: RM7.26) are the OUTPERFORMs under our coverage. The rest are MARKET PERFORMs, save for AFFIN (TP: RM2.17) and CIMB (TP: RM4.06), which are UNDERPERFORMs.

Year on Year, system loans slower in October to +9.1% YoY. October’s system loans growth saw both business and household lending slowing down; business lending (+9.8% YoY vs September: +10.9% YoY) and the household segment was flat at +8.4% YoY. On an annual basis, industry loans were slower (+9.1% YoY vs September: +9.7% YoY) on the back of declining disbursements (YTD 2015: - 7.5%), which outpaced by the decrease in loan repayments (YTD 2015: -4.5%). On an annualised basis, loans grew at +7.1% vs September’s +6.6%. Thus far, the industry loan growth is within our 7-8% growth expectations.

Leading indicators suggesting improved loan growth ahead; loan applications rebounded +12.8% YoY (Sep: -2.0% YoY) while approvals declined moderately by 4.4% YoY (Sep: -15.2% YoY). Demand for loans surged from the previous month where the household segment saw lending applications growth accelerated further by 9.2% (September +4.6% YoY) and business segment rebounded to +15.8% YoY (September: -7% YoY). Overall, September’s total loan applications rebounded to +12.8% YoY (September: -2.0%). Easing the pressure, YoY loan approvals declined slower by 4.2% vs. the 15.2% decline in September 2015.

Assets quality and LLC continue to improve MoM. Continuing from before, net impaired loans (NIL) improved slightly on a YoY basis where it fell by 7bpts whilst on a MoM basis it fell by 2bps to 1.21%. Loan loss coverage (LLC) stayed below the 100% mark (+9bps MoM, -5.7ppts YoY) but improved marginally to 98.15 (Aug: 98.06%) as impaired loans and bad loans provisioning declined by 1.0% and 0.9% respectively MoM.

System LDR increased by 84bpts MoM; excess liquidity continues to constrict. System deposits grew at a slower pace in October (+3.7% YoY vs September: +5.4% YoY). When compared to system loans growth, it remained at a weaker pace (+9.1 YoY vs. September: +9.7% YoY). In turn, this caused the industry’s loan-to-deposit ratio (LDR) to rise further by 84bpts to 86.28 (September: 85.4%) while the system excess liquidity declined further by 21.2% YoY (September: -14.2% YoY). On a MoM basis, it deteriorated by 84bpts. The ratio of current account savings account (CASA) and excess liquidity to total deposit base stood at 25.4% (September: 25.8%) and 13.7% (September: 14.6%), respectively.

Interest spread expanded 7bpts MoM. The interest spread between average lending rate (ALR) and 3-month fixed deposit rate (FDR) expanded to 1.41% (September: 1.35%) as the former rose to 4.54% (September: 4.49%), while the latter was marginally lower by 1bps to 3.13%. We expect this to be a blip as net interest margin (NIM) compression is inevitable given the persistent stiff price-based competition in the market.

Maintain NEUTRAL. No change to our NEUTRAL call on the sector. Structural and cyclical headwinds such as: (i) slower economy (ii) narrowing NIM, (iii) weak capital market activities, and (iv) higher credit costs continue to plague the banking industry. Hence, we still advocate caution and adopt a selective stock picking strategy; MAYBANK (TP: RM9.74) and RHBCAP (TP: RM7.26) are the OUTPERFORM stocks under our coverage. We like Maybank for its superior yield offerings of ~7% while we see deep value for RHBCAP with its Fwd. PBV is merely trading at 0.7x compared to the industry’s Fwd. PBV of 1.5x. The other stocks under our coverage are MARKET PERFORMs, save for AFFIN (TP: RM2.17), and CIMB (TP: RM4.06), which are UNDERPERFORMs (please refer to our peer comparison table at pg. 10).

Source: Kenanga Research - 2 Dec 2015