November loans surged ahead YoY, inching into our expectation of a c.5% system growth for 2016. However, given our view that the banks will still be cautious on asset quality and approval rates still tight, the momentum of the system loan growth will hence likely be flattish for 2017. We maintain a neutral call for the sector. Most of the banking stocks in our universe are maintained at MARKET PERFORM with the exception of CIMB (TP: RM5.27) being rated as OUTPERFORM due to its cheap valuations with AFFIN (TP: RM2.20) maintained at UNDERPERFORM.

Slight improvement in system loans; within expectations. November system loans growth showed some improvement (+5.3% YoY vs. Oct: +4.5% YoY). Despite decelerating (for the 7th consecutive month), the household segment led way (+6.2% YoY vs. Oct 2016: +6.4%) in loans growth. The business segment continued to trend upwards (+4.5% vs Oct 2016: +2.7%). When annualised, system loans continued to accelerate at +4.7% YoY (vs. Oct 2016: +4.0% YoY), inching to our expectation of a 2016 loans growth of ~5%.

Loan applications marginally flattish but approval rate continued to be challenging. November data showed encouraging signs of uptick in loans growth. Loan application was marginally flattish (-0.3% YoY vs. Oct 2016: +1.3% YoY). Although application for business loans showed some weakening, the momentum in decline decelerated (-4.9% YoY vs. Oct 2016: -22.2% YoY) while demand for household loans rebounded to 5.1% YoY (vs. Oct 2016: -4.9% YoY). The falling demand for business loans was led by working capital (- 16.6% YoY vs -19.8% YoY) but on a positive note for both purchase for residential property and construction, which surged +16.1% YoY and +22.1% YoY, respectively, (vs Oct 2016: +0.1% YoY and -23.7% YoY). Demand for household loans was driven by purchase of residential property and credit card at +11.5% YoY and +30.9% YoY, respectively, (vs. Oct 2016: -0.1% YoY and +10.8% YoY respectively). Demand for purchase of passengers continued to decline for the 3rd consecutive month at 3.4% YoY (vs. Oct 2016: -11.8% YoY). On the flip side, decline in approvals rate continued in November at -4.6% YoY (vs. Oct 2016: -4.0% YoY) as approvals for business fell by 6.7% YoY (vs. Oct 2016: +1.7% YoY) while the decline in household loans slows its momentum to -2.2% YoY (from Oct 2016: -10.5% YoY). Negative approvals for working capital and other purposes led the decline in approvals for business loans at -10.5% YoY and -44.6% YoY, respectively (Oct 2016: +4.0% YoY and -22.4% YoY respectively). The decline in approvals for household loans was led by purchase of passenger cars and personal use at -11.8% YoY and -17.2% YoY, respectively (Oct16: -18.5% YoY and -9.9% YoY). System approval rate was not encouraging, declining by 7ppts Mom to 42.0% led by falling approval rate for business loan by 14ppts MoM to 41.6%. YTD system approval rate was flat at 42.7%.

Asset quality improved. On the upside, asset quality improved, with gross impaired loans ratio (GIL) falling by 2bps to 1.63% with both household and business GIL falling by 4bps and 1bps respectively to 2.04% and 1.19%. Meanwhile, loan loss coverage improved MoM to 91.1% but deteriorated YoY (+8ppts MoM and -6ppts YoY). On a MoM basis, impaired loans declined by 0.3% MoM while provisioning improved by 8.4% MoM.

System LDR inched higher, excess liquidity shrinking. System deposits continued to grow at a slower pace against loans (+1.4% YoY vs. +5.3% YoY). As a result, the industry’s loan-to-deposit ratio (LDR) inched higher by 79bps to 89.6% (Oct 2016: 88.8%) while system excess liquidity to total deposit base shrunk slightly by 80bps to 10.4% MoM with system excess liquidity falling by 23.3% YoY to RM174.6b. Meanwhile, there was a slight change in the percentage of CASA to total deposits (26.1% vs. 25.7%).

Interest spread widened. The interest spread between average lending rate (ALR) and 3-month fixed deposit rate (FDR) widened by 2bps to 1.56% (Oct: 1.55%), where the former inched higher to 4.48% (Oct 2016: 4.46%), while the latter was flat at 2.92%). This indicates that stiff price-based competition might be slowing down. With demand for loans expected to be subdued, it is likely that competition for deposits will be marginal.

2017 Outlook. Given our view that the banks will be cautious on asset quality and approval rate still tight, the momentum of the system loan growth will hence likely be flattish for 2017. Our base case estimate for the system loan growth for 2017 is in the range of 5.0-5.5%. Together with the ongoing headwinds such as: (i) flattish net interest margin, (ii) weak capital market activities, and (iii) flattish credit costs expected to be seen in 2017, there are limited opportunities to drive earnings growth for the industry materially beyond our current expectation of a midto-high single-digit growth. We have MARKET PERFORM calls for most of the banking stocks in our universe except for AFFIN (TP: RM2.20) which we maintain an UNDERPERFORM rating while CIMB (TP: RM5.27) is rated OUTPERFORM as the recent fall in its share prices has made it looking attractive again.

Source: Kenanga Research - 3 Jan 2017