2015 loans growth was more subdued compared to a year ago and the deceleration is expected to continue as slower economy and stringent lending continues to exert pressure on the system. Our loans growth estimate for 2016 is a lower 5-6%. Leading indicators suggest that 2016 will still see the business segment in the driver’s seat, as the consumer segment continues to shy away from the limelight. However, on a positive note, asset quality continues to improve. All things considered, the banking sector still lacks re-rating catalysts; while structural and cyclical headwinds such as: (i) moderating economy, (ii) muted loans growth, (iii) constricting liquidity environment, (iv) narrowing NIM, (v) weak capital market activities, as well as (vi) rising credit cost are plaguing the industry. All in, we maintain our NEUTRAL stance on the sector. MAYBANK (TP: RM9.74) and RHBCAP are the only OUTPERFORMs in our universe, while AFFIN (TP: RM2.17) and CIMB (TP: RM4.06) are the UNDERPERFORMs. The others are MARKET PERFORMs

2015 loans growth of 7.9% within expectations. 2015 loans growth ended the year within expectation; coming at the high-end of our 7-8% loans growth estimates at 7.9% (end 2014: +9.3% YoY). Both the business and household segments inclined at a similar pace, with the former lesser at 7.3% YoY (end 2014: +9.7% YoY) and the latter registering a growth of 8.5% YoY (end 2014: +8.9% YoY).

Another tapering of 2016 loans growth expectations to 5-6%. As for 2016, systems loans growth for both the business and households segments are expected to soften further due to the subdued economy (weak Ringgit, lower commodity prices denting public and private expenditure). Additionally weak purchasing power, volatile equity market and cooling property prices are raising consumer pessimism and will discourage spending. Hence, we believe that industry loans growth will taper to 5-6%.

Leading indicators suggests that the business segment will be the engine driver in 2016. Total loans applied for in 2015 inched up slightly to +0.6% YoY (2014: +0.2% YoY) to RM827.2b driven by the Household segment which advanced +3.2% YoY (2014: -5.9% YoY) to RM391.4b. Business loan applications fell 1.6% YoY to RM435.8b limiting overall loan application growth. The rise in household demand was capped by falling loan applications in both the residential property and purchase of passenger cars of -8.0% YoY and -1.4% YoY, respectively. Total loan approvals was down by 2.0% YoY (2014: +2.3% YoY) to RM393.2b on the back of a 6.5% fall in household loans approval (2014: -0.3% YoY) to RM186.4b but mitigated by a 2.4% YoY (2014: +5.0% YoY) increase in business loan approvals to RM206.8b. Falling approvals in the household segment were led by residential property which fell by 14.6% YoY suggesting that the driver of loans growth moving into 2016 could still be the business segment as stringent lending by the banks will likely curtail the growth of the household segment.

Continued improvement in asset quality but LLC regressed. On a positive note, the year ended with improved asset quality as system net impaired loans ratio recorded a 1bps YoY drop to 1.20% (end 2014: -8bps YoY) due to higher loan growth of 7.9% vs. net impaired loan growth of 6.8% (end 2014: 9.3% vs 2.5%). The business segment led the way in impaired loans at growth of 7.7% YoY (end of 2014: -2.2% YoY) while the household segment fell 1.5% YoY (end 2014: - 2.6% YoY). Meanwhile loan loss coverage is still below the 100% mark (-1.08ppts MoM and -4.21ppts YoY) and dipped further to 96.2% as impaired loans grew at 4.25% while provisioning was flat YoY.

System LDR grew higher and excess liquidity narrower. Deposits grew slower at 1.8% YoY (end 2014: +7.6% YoY) compared to loans expansion of 7.9% (end 2014: +8.7% YoY). Hence, system excess liquidity was lower by 4.9ppts YoY to 13.5% (end 2014: 18.4% or -0.8ppts YoY) as the industry loan-deposit ratio increased by 4.9ppts to 86.5% at end of 2015 (end of 2014: 81.2%). The percentage of current account and savings account deposits (CASA) was flat at 25.6% (end 2014: -90bps). As such we expect competition for deposits to continue in 2016.

Interest spread narrowed. Interest spread fell by 10bps to 1.43% (end 2014: -5bps) as average lending rate (ALR) fell by 11bps to 4.57 while the 3-month fixed deposit was flat YoY at 3.13%, reflecting stiff priced based competition for loans and deposits.

Maintain NEUTRAL. As such, we are still NEUTRAL on the sector. No change in our views on structural and cyclical headwinds such as: (i) moderate economy; (ii) muted loans growth; (iii) constricting liquidity environment; (iv) narrowing NIM, (v) weak capital market activities, and (v) higher credit costs plaguing the banking industry. Furthermore, there are no concrete catalysts and/or any game changer going forward. Hence, there is no change in our cautious stance and 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 in RHBCAP with its Fwd. PBV 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. 

Source: Kenanga Research - 2 Feb 2016