Loan growth continued its momentum albeit slower MoM, accelerating at +6.1% YoY in April 2017. Leading indicators were forthcoming with applications slower in April coupled with tight approval rate for the business segment. No change in our view of moderate loans growth with NIMs compression likely to continue as average lending rates and liquidity are falling. We maintain our NEUTRAL call for the sector. Most of the banking stocks in our universe are maintained at MARKET PERFORM with the exception of HLBANK (RM15.15) the only stock in our banking universe at OUTPERFORM.

Upward momentum continues. April industry loan growth continued its upward trajectory with another 10bps to +6.1% YoY at RM1,536m. On a MoM basis, it was flat after mildly accelerating in March. Continuing the trend from last month, loans were driven by business at +6.3% vs household loans, which were flattish at 5.9% (Mar 17: +6.0% vs +5.9%) indicating a still subdued consumer sentiment. The slight uptick can also be attributed to slower loans disbursement at +2.7% YoY (Mar 17: +10.4% YoY) vs slower loans repayments at +2.4% YoY (March 2017: +15.4% YoY). On an annualized basis, loans growth was at +3.9% YoY, vs Mar 2017 annualized growth of +3.8% 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 +8.7% YoY (Mar 2017: +8.8% YoY) continuing its deceleration since April 2015. Hire purchase was still in the negative territory, at -0.5% YoY (Mar 2017: -0.5% YoY). Growth in the business segment was driven by working capital at +7.3% YoY (Mar 2017: +6.8% YoY) with non-residential property slower by 60bps from March 2017 to +5.0% YoY.

Despite the faster loan momentum, loan applications showed the opposite, decelerating suddenly to +0.6% YoY (March 2017: +6.3% YoY. On a MoM basis, there was a sharp decline in applications at 15.6% MoM (March 2017: +25.2% YoY). Both business and household loan applications showed further deceleration with the former declining further at 2.6% YoY (March 2017: -1.7% YoY) while the latter slowing +3.5% YoY (March 2017: +14.3 YoY). The weak business applications were dragged by declining applications for working capital (Apr 2017: -16.1% YoY vs Mar 2017: -22.9% YoY) but mitigated by purchase of securities (Apr 2017: +57.4% YoY vs Mar 2017: +9.8%) and construction (Apr 2017: ++77.8% YoY vs Mar 2017: +32.9%).

Approvals slowed, dragged by Business segment. Compared to the previous month, loan approvals slowed sharply in April 2017 to +0.3% YoY (vs March 2017: +29.3% YoY). The sharp slowdown was driven by business loans declining 8.4% YoY (vs March 2017: +41.6% YoY) while household loans slowed to +9.5% YoY (vs March 2017: +17.0% YoY). Business segment declined led by declining approval in working capital 9.2% YoY (vs March 2017: +35.5% YoY). Slower approvals for purchase of residential property (April 2017: +14.1% YoY vs March 2017: +20.1% YoY) and purchase of passenger cars (April 2017: +3.5% YoY vs March 2017: +14.9% YoY) were the contributing factor in the slowdown for household loans. The deceleration in approvals could be seen in the lower approval rate which slumped by 4.9ppts to 42.0%. Approvals rate for both business and household were at opposite ends with business approvals slumping by 12ppts MoM to 43.4% while household approvals eased slightly, up by 130bps to 40.8% from Mar 2017.

Deposits picked up pace with CASA ratio slightly up, but excess liquidity continued to shrink YoY. Deposits picked up pace in April 2017, raising by 30bps to +3.2% or RM1,718b. CASA demand continued to be strong at +9.7% YoY (March 17: +8.3% YoY) with CASA ratio inching minimally by 10bps to 26.7% in April 2017. As deposits outpaced loans (30bps vs 100bps), loan-to-deposit ratio rose by 32bps to 89.44% in Apr 2017. System excess liquidity to total deposit ratio base fell by 20bps to 10.6% in April 2017 with YoY system excess liquidity continues to fall, falling slower by 50bps to 14.8% YoY to RM181.5b.

Impaired loans picking up pace. On a YoY basis, asset quality deteriorated, as system net impaired loans rose by 4bps to 1.25%. Growth in impaired loans continues to pick up pace in Apr17, accelerating by 220bps to 9.7%, Both the household and business segment showed contrasting fortunes with household slower at +5.7 (March 2017: +7.8%) but business accelerated faster at +11.9% YoY (March 2017: +7.3%). Meanwhile, loan loss coverage is still below the 100% mark (-24bps MoM and - 506bps YoY) at 88.9% as impaired loans growth outpaced provisioning at +9.7% YoY vs +3.7% YoY.

Deposits rate up, but lending rate falls. The 3-month deposit rate tick slightly by 1bps to 2.93% and the average lending rate for April 2017 was lower by 1bps to 4.59% (2nd consecutive month of slowing down). Interest spread fell by 2bps to 1.66% in April 2017. With average lending rates trekking downwards and excess liquidity constricting, we believe NIM compression will continue.

Price competition ahead. We maintained our view of 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 are still tight. We view the slump in business loan applications with tight business approvals as a temporary blip and likely to reverse the trend ahead. We view stiff priced competition trending upwards 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. Returns are still decent for the banking stocks in our universe. Hence, we have MARKET PERFORM calls for most of the banking stocks except for HLBANK (TP: 15.15) which is rated as an OUTPERFORM 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 Jun 2017

Banking - BNM Stats (Apr 2017) – Indicators Shows Weakness Ahead