For July, there was no respite in loans growth deceleration while asset quality continued to deteriorate albeit slightly on YoY basis. However, the gradual pick-up in annualized loans growth reinforced our expectations of loans growth of 5-6% for 2016 supported by the recent cut in OPR. We maintain our NEUTRAL stance on the sector with no clear catalysts in sight internally nor externally. All the stocks in our banking universe are rated as MARKET PERFORM.

Momentum picking up on an annualized basis. No respite in system loans growth as June 2016 growth slowed further (+5.1% YoY vs. June 2016: +5.6% YoY) with both household and business segments slower from the previous month. The former moderated at +6.8% YoY (June 16: +7.1% YoY) while the latter was slower at +3.6% YoY (June 16: +4.2% YoY). Essentially, the slower growth was caused by higher loan repayments (Ytd- 16: +2.2% YoY) which outpaced the decline in loan disbursements (Ytd-16: -3.3% YoY). When annualised, industry loans advanced 3.1% YoY (vs. June 16: +2.8% YoY), still below our expectation of 5-6% for 2016, the third consecutive month of pickup. The third consecutive month of pickup suggests the likelihood of a gradual pickup ahead boosted by the cut in OPR recently.

Leading indicators down but approval rate picking up. Leading indicators showed a blip in momentum for July as loan applications declined by 18.0% YoY (vs. June 16: +3.9% YoY) led by demand for business loan falling at -21.8% YoY (vs. June 16: +12.8% YoY) while demand decline for household loan continued at -13.7% YoY (vs. June 16: -5.5%). The fall in demand for household loans was exacerbated by: (i) decline in credit demand in passenger cars (-23.8% YoY vs. June 16: -0.8% YoY), (ii) lower demand for property financing, which fell 11.8% YoY (June 16: -7.1% YoY in May, and (iii) further fall in personal loans at 26.0% YoY (vs June 16: -23.6% YoY). Compounding the fall in demand was the decline in approvals by 19.4% vs. June 16 of - 21.0% as the approval rate for business loan fell by 18.1% YoY vs. June’s fall of 25.9% YoY while household loan approvals declined further by 20.8% vs. June’s fall of 15.0%. The fall in household approvals was again led by decline in approvals for purchase of residential property and passenger cars of 21.5% YoY and 25.1% YoY, respectively (June 16: -20.1% YoY and - 8.1% YoY, respectively). Overall system loan approval rate (MoM) picked up by 4ppts in July to 4.3% and improved by 20bps to 41.7% YTD.

Further deterioration of asset quality but LLC regressed YoY. On a YoY basis, asset quality deteriorated as system net impaired loans ratio went up by 6bps to 1.30% as net impaired loans outpaced loans growth at +11.23% YoY vs. +5.1% YoY. The business segment led the way as its impaired loans stepped up +12.7% YoY (vs. June 16: +12.4% YoY) and the household segment surged to +4.0% YoY (vs June 16: +0.79% YoY). The business segment saw slower deterioration underpinned by slower impairments in purchase of non-residential property and construction at -19.9% YoY and +5.5% YoY (June 16: +24.5% YoY and +38.4% YoY, respectively) respectively. The surge in impairments in the household segment was hastened by a rise in impairments in purchase of residential property at +3.2% (June 16: +1.0% YoY) but offset by a fall in purchase of passenger cars at 11.9% (June 16: -15.5%). On a MoM basis, net impaired loans ratio deteriorated by 3bps to 1.30%. Meanwhile, loan loss coverage deteriorated YoY to 88.7% (-0.8ppts MoM and -8.61ppts YoY) as impaired loans grew at +11.23% YoY while provisioning fell by 0.2%.

Excess liquidity continued to narrow MoM, but interest spread wider. System deposits rebounded in July (1.0% YoY vs. June 2016: -0.5% YoY) albeit slower compared to system loans growth (+5.1% YoY vs. June 2016: +5.6% YoY). Hence, the industry loan-deposit-ratio rose marginally by 122bps MoM to 88.9%. Likewise, with slower deposits, excess liquidity to total deposit base fell 80bps to 11.3% MoM. The percentage of current account and savings account (CASA) fell slightly by 30bps to 25.6% MoM, due to falling demand deposits (-0.1% vs June 16: -2.3%) while savings deposit was flat at +3.8%. The interest spread between average lending rate (ALR) and 3-month fixed deposit rate (FDR) was up by 6bps to 1.54% where the former was down by 9bps to 4.52% and the latter down by 15bps to 2.98%. The fall is a temporary blip due to the OPR cut and we expect the spread to constrict moving forward as liquidity is still narrow and price-based competition will continue to plague the market.

NEUTRAL stance maintained. We reiterate our NEUTRAL call on the sector. We see no change in our view on the structural and cyclical headwinds such as; (i) moderate economy, (ii) moderate 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 changers going forward. The pickup in annualised loans growth indicates loan growth will pick up pace supported by the cut in OPR recently. We maintain our view on the system’s loan growth of 5-6% for 2016.

We have a MARKET PERFORM call for all the banking stocks in our universe. We downgraded CIMB to MARKET PERFORM as the recent surge in share price has seen valuation racing ahead. Fig 1: Industry Loan Growth by Breakdown Fig 2: Industry

Source: Kenanga Research - 1 Sep 2016