In March, loans growth continued to decelerate but asset quality stablilized on MoM basis. However, indicators still point to subdued outlook with loan applications and approvals still falling. Thus, we maintain our NEUTRAL stance on the sector. MAYBANK (TP: RM9.33) is the only OUTPERFORM call in our universe, while AFFIN (TP: RM1.80), CIMB (TP: RM4.46) and HLBANK (TP: RM11.39) are rated as UNDERPERFORM. The others are labelled as MARKET PERFORM.

No let-up in system loans growth deceleration. March 2016 system loans growth decelerated further (+6.4% YoY vs. Feb 16: +7.4% YoY) echoing the deceleration in both the household and business segments. The former decelerated slightly to +7.5% YoY (Feb 16: +7.8% YoY) while the latter at +5.5% YoY (Feb 16: 7.0% YoY). When annualised, industry loans advanced only a mere 1.8% YoY (vs. Feb 16: +2.0% YoY) coming in below our expectation of 5-6% for 2016. Essentially the slower growth was caused by higher loan repayments (Ytd-16: +3.6% YoY) which outpaced the decline in loan disbursements (Ytd-16: -2.0% YoY).

Loan applications slower while approvals continue to decline. Leading indicators suggest weakness ahead with loan applications slower at +1.1 % YoY (vs. Feb 16: 6.0% YoY) as demand for business loan declined by 4.9% YoY vs. February growth of +6.9%. Surprisingly, demand for household loan surged 7.9% vs. a 5.0% growth in February. Demand for household loans was capped by falling demand for passenger cars (-16.5% YoY vs. Feb: -16.7%) although demand for property financing accelerated to +5.6% YoY from a moderate rise by 1.9% YoY in February. Compounding the slowdown in demand was further decline in approvals by 23.4% vs. Feb: -16.8%) as the approval rate for business loan fell further by 30.1% YoY vs. Feb fall of 15.2% YoY. Household loan approvals fell by 15.2% but lower than February’s fall of 18.6%. The fall in household approval was again led by decline in approvals for purchase of residential property and passenger cars of 13.8% and 32.9%, respectively (Feb: -21.6% and -29.5%). Overall system loan approval rate (MoM) was down by 7bps to 38.5% for Mar 2016 and YTD-2016 falling by 12bps to 40.9%.

Asset quality stabilized, but LLC regressed YoY. On a YoY basis, asset quality stabilized as system net impaired loans ratio was flattish at 1.20% due to loan growth slightly outpacing net impaired loans at +6.4% YoY vs. +4.5% YoY. The business segment led the way in deceleration as its impaired loans grew at +8.0% YoY (vs. Feb 16: +8.3% YoY) but the household segment was marginally higher at +1.2% YoY (vs Feb 16: +0.7% YoY). The business segment saw impairments slower due to purchase of fixed assets falling by 8.1% YoY (vs Feb 16: +5.3% YoY) while impairments in construction and purchase of non-residential continue rose 32.8% YoY and 25.8% YoY respectively (Feb 16: +31.9% YoY and +23.7% YoY respectively. The marginal rise in impairments in the household segment was due to a slower rise of impairments in personal use at +17.7% (vs Feb 16: +21.5%). Impairments in purchase of residential property and passenger cars fell YoY at 0.3% and 17.9% (Feb 16: +1.4% YoY and -15.7% YoY). Meanwhile, loan loss coverage deteriorated YoY to 94.3% (+4.5ppts MoM and -4.5ppts YoY) as impaired loans grew at 4.6% YoY while provisioning continued to be flat YoY.

System LDR higher and excess liquidity narrowed MoM. System deposits declined in March (-0.9% YoY vs. Feb 16: +1.2% YoY) compared to system loans growth (+6.4% YoY vs Feb 16: 7.4% YoY). Hence, the industry loan-deposit-ratio rose marginally by 7bps MoM to 86.9% and system excess liquidity narrowed further by 31.1% YoY (Feb 16: -26.6% YoY). The percentage of current account, savings account (CASA) and excess liquidity to total deposit base stood at 25.4% (Feb 16: 26.1%) and 13.1% (Feb 16: 13.2%), respectively.

Interest spread stabilized MoM. The interest spread between average lending rate (ALR) and 3-month fixed deposit rate (FDR) was flat at 1.48% where the former and the latter were flat at 4.61 and 3.13%, respectively. 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.

MAYBANK (TP: RM9.33) is the only OUTPERFORM stock under our coverage where we like its exposure to the Asean-5. The other stocks under our coverage are mostly MARKET PERFORMs, save for AFFIN (TP: RM1.80), CIMB (TP: RM4.46) and HLBANK (TP: RM11.39) which are rated as UNDERPERFORM.

Source: Kenanga Research - 3 May 2016