No let-up in system loans growth deceleration. February 2016 system loans growth decelerated further (7.4% YoY vs Jan 16: 7.7% YoY), echoing the deceleration in household loans growth (+7.8% YoY vs Jan: +8.5% YoY) while business loan reversed its downward momentum to inch higher 7.0% YoY (Jan: +6.8% YoY). When annualised, industry loans advanced only a mere 2.0% YoY (vs Jan: +1.8% YoY) coming in below our expectation of 5-6% for 2016; the continuation of which could pose a downside risk to our earnngs forecasts. In the meantime, we leave our targets unchanged on an expectation of a pickup in working capital financing (+9.8 YoY vs. Jan: +10.5%) as this is usually lumpy in nature.

Moderating loan growth ahead as loan applications and approvals slow. Leading indicators suggest weakness ahead with loan applications slower at +6.0 % YoY (vs Jan: +9.3% YoY) as demand for business loan moderated to +6.9% YoY vs. January demand of +16.4%. Surprisingly, demand for household loan surged 5.0% after a subdued 2.4% growth in January. Demand for household loans was capped by falling demand for passenger cars (-16.7% YoY vs. Jan: -13.7%) although demand for property financing rebounded to +1.9% after falling by 6.5% in January. Compounding the slowdown in demand was further decline in approvals at -16.8% vs. Jan: -14.0%) as the approval rate for business loan fell by 15.2% vs. Jan fall of 6.6%. Household loan approvals fell by 18.6% but lower than January’s fall of 21.2%. The fall in household approval was again led by decline in approvals for purchase of residential property and passenger cars of 21.6% and 29.5%, respectively (Jan: -34.0% and -11.9%).

Asset quality improved, but LLC regressed. On a YoY basis, asset quality improved as system net impaired loans ratio fell by 6bps to 1.20% (Feb 2015: 4bps YoY) due to loan growth slightly outpacing net impaired loans at 7.4% YoY vs. 2.6% YoY. The business segment led the way in impaired loans growth at +8.3% YoY (vs. Jan: 6.3% YoY) while the household segment was marginally higher at 0.7% YoY (vs Jan: -1.0% YoY). Meanwhile, loan loss coverage dipped further to 92.8% (-2.8ppts MoM and -5.1ppts YoY) as impaired loans grew at 5.4% YoY while provisioning continues to be flat YoY.

System LDR lower and excess liquidity widened MoM. System deposits grew at a faster pace in February (1.2% YoY vs. Jan: 0.9% YoY) but still slower compared to system loans growth (7.4% YoY vs Jan: 7.7% YoY). Hence, the industry loan-deposit-ratio dipped by 47bps MoM to 86.8% and system excess liquidity narrowed by 26.6 YoY (Jan: -29.6% YoY) but improved on a MoM basis at +4.5% (Jan: -6.5% MoM). The percentage of current account, savings account (CASA) and excess liquidity to total deposit base stood at 26.1% (Jan 25.9%) and 13.2% (Jan: 12.7%), respectively.

Interest spread widened by 2bps MoM. The interest spread between average lending rate (ALR) and 3-month fixed deposit rate (FDR) widened to 1.48% (Jan: 1.45%) where the former improved to 4.61% (Jan: 4.58%) while the latter was flat at 3.13%. While it looks like the banks are able to impose better pricing on assets, liquidity is still narrow and stiff price-based competition will continue 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.

Source: Kenanga Research - 1 Apr 2016