Loan growth reversed its momentum, accelerating at +6.0% YoY in March 2017 after slowing down the previous month. Leading indicators were mixed with applications slower in March after a surge in February 2017 coupled with still tight approval rate for the household segment. No change in our view of moderate loans growth with NIMs compression likely to continue as average lending rates and CASA are falling. We maintain our NEUTRAL call for the sector. Most of the banking stocks in our universe are maintained at UNDER PERFORM with the exception of BIMB (TP: RM4.54) and PBBANK (TP: RM21.17) at MARKET PERFORM with HLBANK (RM15.13) the only stock in our banking universe at OUTPERFORM.

Loans bounced back in March led by the business segment. March industry loan growth rebounded up by 70bps to 6.0% YoY at RM1,578.8m. On a MoM basis, it was up by 60bps to 0.6%, accelerating after four months of deceleration. Bucking the previous trend, loans were driven by business at +6.0% vs household loans of +5.9% (Feb 17: +4.8% vs +6.0%) with household continuing its downward trek since Feb 2015 indicating weak consumer sentiment. The rebound can also be attributed to higher loans repayment at +15.4% (YoY (Feb 17: +3.3% YoY) vs loans disbursements at +10.4% YoY (Feb 2017: +7.1% YoY). On an annualized basis, loans growth was at +3.8% YoY, vs Feb 2017 annualized growth of +2.3% YoY.

Mortgages still the driving force in loans but slowing down. Growth in the household loan was again attributed to loan for residential property albeit at a slower pace of 8.8% YoY (Feb 2017: +9.0% YoY) continuing its deceleration since April 2015. Hire purchase was still in the negative territory, albeit at a slower pace at -0.5% YoY (Feb 2017: -0.9% YoY). Growth in the business segment was driven by non-residential property at +5.6% YoY albeit slower (Feb 2017: +5.7% YoY) and working capital maintained its growth at 6.8% YoY faster by 70bps faster by 20bps from February.

Despite the faster loan momentum, loan applications showed the opposite, slower to single digit to +6.3% YoY (Feb 2017: +21.2% YoY). Recall that February’s surge was the result of a lower base effect. On a MoM basis, loan applications continued its upward trend surging +25.2% MoM (Feb 2017: +2.8% MoM). Both business and household loan applications were slower in March, with the former declining 1.7% YoY (Feb 2017: +18.6% YoY) while the latter slowing +14.3 YoY (Feb 2017: +24.2% YoY). The weak business applications were dragged by declining applications for working capital (Mar 2017: -22.9% YoY vs Feb 2017: +9.2% YoY) but mitigated by purchase of non-residential property (Mar 2017: +19.2% YoY vs Feb 2017: +5.8%). The slower demand for household loans was propelled by slower demand for passenger cars (Mar 2017: +6.8% YoY vs Feb 2017: +24.3% YoY) and slightly slower demand for residential property (Mar 2017: +20.8% YoY vs. Feb 2017: +34.5% YoY).

Approvals easing for the business segment. Loans approvals surged ahead in March 2017 to +29.3% YoY (vs Feb 2017: +17.4% YoY). The rebound was driven by business loans surging ahead at +41.6% (Feb 2017: +18.5% YoY) while household loans inched at 17.0% YoY (Feb 2017: +16.1% YoY). The approval in the business segment was led by higher approval in working capital (+35.5% YoY vs Feb 2017: +0.4%), purchase of securities (+27.4% YoY vs Feb 2017: +52.0%) and construction (Mar 2017: 448.7 vs Feb 2017: +27.7% YoY). High approvals for the purchase of residential property albeit slower (+20.1% vs Feb 2017: +27.3% YoY) drove the approvals for the household segment. The surge in approvals could be seen in the better approval rate which improved by 4.3ppts to 46.9%. Approvals rate for both business and household were at opposite ends with business approvals surging by 10ppts MoM to 55.5% while household approvals are still tight, up by only 20bps to 39.5% from Feb 17.

Deposits pick up pace but CASA ratio fell and excess liquidity continues to shrink YoY. Deposits picked up pace in March 2017, raising by 100bps to +3.2% or RM1,722.8b. CASA demand continued to be strong at +8.3% YoY (Feb 17: +5.8% YoY) but CASA ratio fell 50bps to 26.6% in March 2017. As deposits outpaced loans (100bps vs 70bps), loan-to-deposit ratio fell by 31bps to 89.15% in Mar 2017. System excess liquidity to total deposit ratio base rose slightly by 40bps to 10.9% in March 2017 but YoY system excess liquidity continues to fall, falling by 14.7% YoY to RM186.9b

Asset quality improved YoY, but impairments growth showed signs of picking up pace YoY. On a YoY basis, asset quality improved, falling by 2bps as system net impaired loans fell by 2bps to 1.22%. However, growth in impaired loans picked up pace in March 17, accelerating by 290bps to 7.5% reversing the slower momentum since November 2016. Both the household and business segment showed faster impairments, growing at +7.8% and +7.3%, respectively (Feb 2017: +4.0% and +5.0%, respectively). Meanwhile, loan loss coverage is still below the 100% mark (-167bps MoM and -516bps YoY) at 89.1% as impaired loans growth outpaced provisioning at +7.5% YoY vs +1.6% YoY.

Deposits rate stable but lending rate falls. The 3-month deposit rate remained intact at 2.92% and the average lending rate for Mar 2017 was lower by 1bps to 4.60% (after four months of picking up momentum). Interest spread was flat at 1.68% in Mar 2017. With CASA falling and average lending rates trekking downwards, we still believe that NIMs compression will continue despite excess liquidity looking to widen.

No change in Outlook. Despite the faster loan momentum, we maintained our view of moderate loans growth ahead as it will be dragged by the household segment underpinned by weak consumer sentiments coupled with banks being cautious/selective on asset quality as approval rates still tight, especially for the household segment. Stiff price-based competition might trend upwards in 2017 as competition for both loans and deposits intensified for higher liquidity and longer-term funding. Together with higher impairments and elevated credit costs (coming from inflationary pressures), there are limited catalyst to drive earnings growth for the industry materially beyond our current expectation of a mid-to-high single-digit growth.

Valuations are already stretch for the banking stocks in our universe. Hence, we have UNDERPERFORM calls for most of the banking stocks except for BIMB (TP: RM4.54) and PBBANK (RM21.17), which are at MARKET PERFORM while HLBANK (TP: 15.13) is rated as an OUTPERFORM call due to its undemanding valuation. Its relatively strong asset quality and adequate coverage should see minimum risk of higher credit cost going forward.

Source: Kenanga Research - 2 May 2017