Total loan amount for 2016 grew at 5.3% YoY, above our expectation of a c.5% system growth but slower than 2015 growth of 7.9%. Weaker growth pace was seen in both residential and nonresidential properties, hire purchase and purchase of securities. Given that leading indicators shows weakening ahead with our view that the banks will be cautious on asset quality with tight approval rates, the momentum of the system loan growth will hence likely be subdued 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) which is rated as OUTPERFORM with AFFIN (TP: RM2.20) maintained at UNDERPERFORM.

Full-year loan growth marginally above our expectations. The 2016 banking industry loan growth dipped further from 2015, easing by 260bps to 5.3% (Nov 16: +5.3% YoY) at RM1,521.5m but came in slightly above our expectations of ~5%, partly due to a late surge in loans in November and December (both at +0.9% MoM) driven by business loans (November and December at +1.3% and +1.2% MoM, respectively). Overall, YoY, both business and households saw weakening in growth at 4.5% YoY and 6.1% YoY, respectively (2015: 7.3% YoY and 8.1% YoY, respectively). We expect the growth rate to show weakness for 2017.

The full-year slower growth in the household loan of +6.1% YoY (vs. Nov 2016: +6.2% YoY) was mainly attributable to loan for properties and passenger cars. Mortgage loan growth continued to slow from +9.5% YoY in the preceding month to +9.2% YoY in Dec 2016 with hire purchase continues its downward trend at -0.1% YoY (Nov 2016: -0.8% YoY. However, there were minor improvements in personal use and credit card loans in the month with growth of +4.6% YoY (vs. Nov 2016: +4.3%) and +2.5% YoY (vs. Nov 2016: +2.0%), respectively. The business loan growth was flattish at +4.5% YoY for Dec 2016, dragged by flattish growth in the purchase of non-residential property and weaknesses in the purchase of securities at +6.1% YoY and -1.0% YoY (Nov 2016: +0.2% YoY), respectively, but mitigated by improvement in working capital at +5.6% YoY (Nov 2016: +4.4% YoY).

Leading indicators shows weakening ahead. Despite the positive loan growth in December, loan disbursements were weak, declining 4.6% YoY (Nov 2016: +9.6%). Loan application again showed decline of 8.0% YoY in Dec 2016 vs. -0.3% in Nov 2016. Both business and household loan applications dipped with the former declining further by 10.2% (Nov 2016: -4.9% YoY) while the latter fell 5.7% YoY (Nov 2016: +5.1% YoY). The weak business applications were dragged by falling applications for working capital (Dec 2016: -16.2% YoY vs. Nov 2016: -16.6% YoY) and purchase of non-residential property (Dec 2016: -11.4% YoY vs. Nov 2016: +16.1% YoY). The weak demand for household loans was dragged by falling demand for mortgage (Dec 2016: -2.7% YoY vs. Nov 2016: +11.5% YoY) and personal use (Dec 2016: -29.0% YoY vs. Nov 2016: -15.8%). Loan approvals continued to decline at 12.8% YoY (vs Nov 2016: -4.6%) with both business and household continued to decline at 12.9% YoY and 12.8% YoY, respectively, led by falling approvals in construction (Dec 2016: -40.1% YoY vs Nov 2016: -2.1% YoY), mortgage (Dec 2016: -13.5% YoY vs. Nov 2016: +0.2% YoY) and hire purchase flattish at -11.8%. Surprisingly, system approval rate was up by 8ppts to 50.2% in Dec 2016 indicating better loans quality despite falling application. Overall approval rate for 2016 was up by 50bps to 43.2%.

Deposit growth improved to +1.5% YoY but liquidity continued to fall. Total deposit in 2016 was at RM1,695.4b, rising by 10bps from Nov 2016. The slight increase was because of the improved demand for CASA at +5.0% YoY vs. Nov 2016: +4.5% YoY) mitigated by the decline in fixed deposit, foreign exchange and other deposits. The loan-to-deposit ratio meanwhile had risen marginally by 12bps to 89.74% in Dec 2012. System excess liquidity to total deposit base shrunk slightly by 10bps to 10.4% MoM with system excess liquidity falling by 23.0% YoY to RM173.9b.

Minor increase in interest spread. The 3-month deposit rate remained intact at 2.92% and the average lending rate for December 2016 was up by 1bps to 4.49%. Interest spread was slightly higher by 1bps to 1.57% in December 2016 from the previous month. We believe that stiff price-based competition might be slowing down in 2017 and 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 with approval rate still tight, the momentum of the system loan growth will hence likely be flattish for 2017. We expect NIMs compression to be subdued/flattish given that banks will improve on their CASA and marginal competition for deposits.

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. Pending the release of the banks’ quarterly results this month we maintain our MARKET PERFORM calls for most of the banking stocks in our universe except for AFFIN (TP: RM2.20) which we maintain as UNDERPERFORM rating while CIMB (TP: RM5.27) is rated OUTPERFORM.

Source: Kenanga Research - 2 Feb 2017