Industry statistics continued to be uninspiring as system loans growth still decelerated and outpaced deposits growth. However, asset quality stabilized. All things considered, no re-rating catalysts are in sight; with 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, plaguing the industry. All in, we maintain our NEUTRAL stance on the sector. MAYBANK (TP: RM9.33) and RHBCAP (TP: 6.23) are the only OUTPERFORM calls in our universe, while AFFIN (TP: RM1.68) and CIMB (TP: RM4.04) are rated as UNDERPERFORM. The others are labelled as PERFORM.

System loans growth continues its deceleration. January 2016 system loans growth decelerated further (7.7% YoY vs Dec15: 7.9% YoY). This was primarily due to a subdued take-up for loans in the business segment (6.9% YoY vs Dec: 7.3% YoY). On the other hand, household loans were stronger maintaining its 8.5% momentum for the third consecutive months. When annualised, industry loans advanced only a mere 1.8% YoY coming in below our expectation of 5-6% for 2016. However, we maintain our system loans growth target of 5-6% for now as we expect working capital financing (10.5% YoY vs Dec: 10.4% YoY) from the business segment to pick up at a slight pace later in the year as it is usually lumpy in nature.

Leading indicators are mixed but suggests that the business segment will be the engine driver. Demand for loans surged at 9.3% YoY (vs 0.7% YoY in Dec) driven by business loans at 16.4% YoY (vs Dec: 2.3% YoY). Household loans rebounded from - 0.9% YoY in December to 2.4% YoY for January. Demand for household loans were capped by falling loan applications in both the residential and property and purchase of passenger cars at -6.5% YoY and -13.7% YoY, respectively (Dec: -8.0% YoY and -1.4% YoY respectively). However loan approvals for the household segment continued to decline at -14.0% YoY (vs Dec: -0.6%) while the business segment approvals fell 6.6% (vs Dec: +14.0% YoY). Decline in household were led by decline in approval of purchase of residential property and passenger cars at -34.0% YoY and -11.9% YoY, respectively (vs Dec: -14.6% YoY and +1.7% YoY).

Asset quality stabilized but LLC regressed. On a YoY basis asset quality stabilized as system net impaired loans ratio was flattish at 1.21% (end Jan 2015: -9bps YoY) due to loan growth slightly outpaced net impaired loans at 7.7% vs. 7.0%. The business segment led the way in impaired loans at growth of 6.3% YoY (vs Dec: 7.7% YoY) while the household segment rose 1.0% YoY (vs Dec: -1.5% YoY). Meanwhile, loan loss coverage is still below the 100% mark (-0.6ppts MoM and -4.4ppts YoY) and dipped further to 95.6% as impaired loans grew at 4.4% while provisioning was flat YoY.

System LDR grew higher and excess liquidity narrower. System deposits grew at a slower pace in January (0.9% YoY vs Dec: 1.8% YoY) and slower compared to system loans growth (7.7% YoY vs Dec: 7.9% YoY). Hence, the industry loandeposit- ratio continues to surge by 80bps MoM to 87.3% and system excess liquidity narrowed by 29.6% YoY (Dec: -25.2% YoY). The percentage of current account, savings account (CASA) and excess liquidity to total deposit base stood at 25.9% (Dec: 25.6%) and 12.7% (Dec: 13.5%). respectively.

Interest spread widened by 2bps MoM. The interest spread between average lending rate (ALR) and 3-month fixed deposit rate (FDR) widened to 1.45% (Dec: 1.43%) where the former improved to 4.58% (Dec: 4.57%) while the latter was flat at 3.13% (Dec: 3.13%). We believe this is a temporary blip as excess liquidity is still narrowing and stiff price-based competition continues to plague the market.

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: RM9.33) and RHBCAP (TP: RM6.23) 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: RM1.68), and CIMB (TP: RM4.04), which are UNDERPERFORMs.

Source: Kenanga Research - 1 Mar 2016