OVERVIEW

Monetary conditions remain tight in August following a monthly decline in Net Claims on Government and moderating private sector credit growth. Broad money or M3 growth edged up to 2.4% YoY from 2.3% in July, influenced by the low base effect from capital flight last year. The small 0.1% MoM growth in M3 after a shrinkage registered in July further illustrates the tight monetary conditions. Narrow money supply or M1 grew a mere 0.2% MoM in August, suggesting weak consumer spending. System-wide loan growth rose 0.3% MoM (July: 0.1%), while total banking system deposits was little changed in August. As a result, loan-to-deposit ratio rose to a seven-month high of 89.0%. Going forward, we believe the festivities, holiday season and ongoing infrastructure projects may provide some upside to domestic money supply and credit growth in the coming months, but the growth momentum would largely remain weak. We maintain our projection for the loan growth to shrink to 5.0% - 6.0% in 2016 in line with weaker GDP growth (2016 forecast: 4.0-4.5%)

Broad money supply or M3 growth edged up to 2.4% YoY in August from 2.3% YoY in July. On a monthly basis, M3 grew just 0.1% after shrinking RM13.3b in July, indicating a weak recovery momentum in broad money supply.

The higher M3 growth was mainly attributable to an acceleration in net foreign assets growth to 8.1% YoY (July: 4.9%), influenced by low base effect from capital flight last year. However, a slower growth in loans extended to the private sector at 5.3% YoY (July: 6.1%) combined with a moderation in Net Claims on Government have largely capped the upside of M3 yearly growth.

Narrow money supply or M1 registered a mere 0.2% monthly growth in August after suffering a shrinkage in the previous month (July: -2.6% MoM). On a yearly basis, the narrow money supply moderated to 1.0% YoY from 2.0% registered in July. This suggests that consumer spending is still weak in view of economic growth uncertainty.

Loan growth moderated for the twelfth consecutive month to 4.2% YoY in August from 5.1% YoY in July. The loan growth in August has reached the lowest level in at least a decade, dampened by tepid deposit growth and tightening in bank lending activities in the face of rising loan impairment issues.

Private sector financing growth slowed to 6.3% YoY from 6.8% in July. Business loans grew a slower 1.9% YoY in August (July: 3.7%). However, business loans increased on a monthly basis, with increasing volume of loans extended to the wholesale and retail trade; restaurants and hotels; manufacturing; and transport, storage and communication sectors. Meanwhile, household loan growth was stable at 5.7% YoY in August.

Total bank deposit moderated to 0.8% YoY in August from 1.0% in July. On a monthly basis, deposit was little changed in August after a decline in July.

The gap between system-wide loan growth and deposit growth widened in August. Consequently the loan-to- deposit ratio rose to a seven-month high of 89.0% in August from 88.8% in July. The LD ratio has been rising for the past three months, a reflection of receding liquidity trend.

OUTLOOK

Going forward, we believe the festivities, holiday season and ongoing infrastructure projects such as the new MRT system and highways may provide some upside to domestic money supply and credit growth in the coming months. However, the growth momentum of money supply would likely remain weak for the remainder of the year. This is in view of the still-weak consumer spending and uncertain external conditions. Meanwhile, we maintain our projection for the average banking system loan growth to shrink to 5.0% - 6.0% in 2016 from 7.9% recorded in 2015.

The recent series of positive US job market and inflation data have brightened the prospect of US Fed Funds rate hike before the end of the year. Conversely, this will increase the volatility of capital movements and may exert additional downside risk to the recovery momentum of domestic financial sector. However, we view that an established domestic bond market, stable sovereign debt ratings and relatively higher yield spread against U.S. assets would help to cushion the domestic financial system from any adverse impact from large capital outflows in the event of a US rate hike.

Source: Kenanga Research - 4 Oct 2016