OVERVIEW

• Monetary conditions stabilized in September alongside solid private sector financing activities. Broad money or M3 expanded 1.1% MoM, the highest monthly growth in a year, but moderated slightly to 2.2% YoY from 2.4% in August, due to a higher base comparison from last year.
• Similarly narrow money supply or M1 growth moderated to 0.1% YoY though it was up 0.9% MoM, signalling some improvement in consumer sentiment and spending.
• System-wide loan growth remained steady at 4.2% YoY and quickened to 0.8% on a monthly basis (August: 0.3%). Similarly, the banking system deposits expanded by 1.2% YoY, a twelve-month high.
• As a result, loan-to-deposit ratio fell to 88.7%. While we believe year-end festivities and ongoing infrastructure projects will provide some support to domestic money supply and credit growth, rising uncertainty on the global front may temper domestic demand growth and set a high bar for a strong recovery in monetary conditions in 4Q16.
• With the latest data showing domestic monetary and liquidity conditions to remain stable, we expect BNM to likely keep the OPR at 3.00% for the remainder of the year.

Broad money supply or M3 growth moderated slightly to 2.2% YoY in September from 2.4% YoY in August. On a monthly basis, however, M3 grew at a robust 1.1% in September, the strongest growth in a year. This translates into RM17.7b expansion in M3 from previous month, indicating a sign of stabilization in broad money supply growth. The higher M3 monthly growth was mostly due to an acceleration in Claims on the Private Sector growth to 0.9% MoM (August: 0.4%), resulted from higher loans extended by banking institutions to the private sectror. In addition, a 17.2% monthly decline of government deposits placed in banking institutions, likely triggered by payments of sovereign notes matured in September, was a major factor behind the accelerated monthly M3 growth.

Narrow money supply or M1 moderated to 0.1% YoY from 1.0% registered in August mainly influenced by a higher base a year ago. However, on a month-on-month basis it expanded for a second straight month at a higher rate of 0.9% from 0.2% in August suggesting that there could be some imrpovement in consumer sentiment and spending.

Banking system loan growth remained steady at 4.2% YoY in September after experiencing a growth slowdown for the past twelve consecutive months. This raises hopes that the loan growth trend could have bottomed out in September, although its prospect still faces headwinds from the weak property market and consumer durable goods due to tightening in bank lending activities.

Private sector financing growth quickened to 6.5% YoY from 6.3% in August, mainly attributable to higher growth in net outstanding corporate bonds. Business loans growth edged up to 2.0% YoY in September (August: 1.9%), with increasing volume of loans extended to real estate; agriculture; manufacturing; and finance, insurance and business services sectors. On the other hand, household loan growth inched lower to 5.6% YoY from 5.7% in August.

Total bank deposit remained stable at 0.8% YoY in September. On a monthly basis, deposit growth rose to a 12- month high of 1.2%.

Resource balance improves. The gap between system-wide loan growth and deposit growth narrowed in September as total net deposits of the banking system was higher than that of net total loans. This boosted the banking system resource balance. As a result, the loan-to-deposit ratio fell to 88.7% in September from 89.0% in August, reversing the rising trend of LD ratio in the previous three months.

OUTLOOK

Year-end booster? We continue to believe the festivities, holiday season and ongoing infrastructure projects will provide some support to the money supply and credit growth in 4Q16. However, rising uncertainties on the global front along with lack of positive catalysts to spur consumer and business spending will likely set a high bar for a strong recovery in domestic monetary conditions. Though improving, consumer sentiment remains relatively weak as reflected in the latest MIER Consumer Sentiment Index, falling to 73.6 in 3Q16 from 78.5 in the previous quarter. 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.

Steady for now. With the relative stability showed in the latest domestic monetary and liquidity conditions, we expect BNM to keep the OPR at 3.00% for the remainder of the year. BNM might also refrain from further monetary easing in the near term in consideration of the uncertain global economic developments and events including the prospect of a likely US Fed Funds rate hike before the end of the year. However, we still believe that there is room for a rate cut in the event of a sharp economic downturn or an external shock.

Source: Kenanga Research - 1 Nov 2016