OVERVIEW

• M3 accelerates to a 15-month high. Broad money supply (M3) continues to expand at a steady pace, growing at 4.4% in January, and the highest since September 2015.
• M1 continues to grow. M1 growth expands further to 6.5% YoY in January (December: 5.7%), a 13-month high, though on a MoM basis, growth was more moderate at 1.6% (December: 3.4%)
• Resource balance easing slightly. Loan growth was just a touch higher at 5.6% in January (December: 5.3%). Deposits, meanwhile, expanded by 2.6% (December: 1.5%). Overall, loan-deposit ratios eased at 89.4 after reaching a multi-year high of 89.8 in December.
• Monetary condition is presently healthy with M3 growth supported by modest credit expansion amidst stable short-term interest rates. Based on our projection of a recovery in demand and stronger economic growth into 2017, we are upbeat on improved prospects for Malaysia’s monetary and credit conditions.
• OPR to stay at 3.00%; likely to remain so for 2017. Based on prevailing macroeconomic conditions, we believe that BNM is likely to continue holding the OPR during its next meeting, indeed for the rest of 2017. As with our previous report, we believe that the present OPR strikes a delicate balance on supporting growth and holding off inflation (which stood at 3.2% in January (December: 1.8%).

M3 growth hits 15-month high. Broad money supply (M3) grew at 4.4% YoY compared to 3.0% in December. It’s also the highest since September 2015. On a MoM basis, this represents a 0.9% expansion (RM15.1b) compared to 0.8% (RM13.0b) in December. Growth in M3 continues to be driven by the strong growth of loans to private sector which grew 5.8%, slightly lower than 6.0% during December. This, in turn, was partially offset by higher growth in the Islamic Investment Accounts (reflected by a fall in the “Other influences” subcomponent to -RM648.7b from -RM640.0b during December).

Liquidity continues to expand. Narrow money (M1) supply edged up 6.5% YoY in January from 5.7% YoY in December. This was its highest YoY growth in 15 months. However, on a MoM basis, M1 increased by just 1.6% (RM6.3b) compared to 3.4% (RM12.6b) during December as demand deposits declined by 0.2% MoM (December: 3.4%) amidst a sharp growth in currency in circulation at 8.0% MoM (December: 3.3%)

Credit growth expands. Outstanding banking sector loans rose 5.6% YoY, slightly higher than 5.3% in December. It was up by only 0.4% MoM compared with 0.9% in December. Nonetheless, loan growth was driven by continued growth in household loans, despite moderating slightly to 5.2% (December: 5.3%). Sorted by loan purpose, loan growth was driven by financing of residential property (9.1% YoY vs Dec: 9.2%) and working capital loans (5.6% YoY vs Dec: 6.3%).

Deposits continue to grow. Deposit growth was accelerated somewhat on a YoY basis at 2.6% (December: 1.5%). Deposit growth was more moderate on a MoM basis, at 0.4% compared to 0.8% in December.

Loan ratios stable in January. However, monthly deposit (RM6.7b) growth outpaced monthly loan (RM6.4b) growth in absolute terms, albeit marginally at RM264m (Dec: -RM664). As a result, the Loan-to-Deposit Ratio (LDR) edged lower to 89.4 from 89.8 during December. The relatively stable LDR was further supplemented by similar moderation in BNM’s alternative banking sector liquidity metric including the loan-to-fund ratio which stood at 84.0 in January from 84.3 during December.

Stable rates. Short term rates, meanwhile, have likewise stood somewhat unchanged with the weighted average base rate of commercial banks at 3.62% in January (December: 3.61%) while the weighted average base rates on outstanding loans stood at 5.20% (December: 5.21%). Combined with steady loan growth, this continues to support the view that monetary conditions are stable.

OUTLOOK

Monetary conditions: healthier. With modest expansion in the M3 and the slight expansion in loan growth, we believe that present monetary conditions remains healthy and will continue to improve. The flat interest rate trajectory amidst healthy growth of financing suggests that liquidity remains ample and seems to be more supportive of growth. This may foster a virtuous cycle of sorts.

OPR to stand in absence of major surprises. We maintain our OPR forecast of 3.00% during the next meeting (scheduled Thursday) and likely for the rest of 2017. As with our previous reports, we do not anticipate any strong headwinds to growth that would necessitate a rate cut. While the threat to capital outflow (along with its Ringgit ramifications) has been contained somewhat, we believe that the BNM will likely adopt a more cautious stance moving forward. At this juncture, we believe that the present OPR strikes a delicate balance on supporting growth and holding off inflation (which stood at 3.2% in January (December: 1.8%)

Source: Kenanga Research - 1 Mar 2017