Loan growth took a breather in May, slower by 60bps from the previous month to +5.5% YoY. In contrast from the previous month, loans were driven by household loans at +5.9% YoY vs business loans at +5.1% YoY. Despite the slower momentum, leading indicators showed favourable conditions of pick-up in loans ahead. Business loans are likely to pick up pace ahead on easing of approvals as asset quality appears to be contained. No change in our view of system loans growth around +5.5% to +6.0% and we maintain our Neutral call for the sector. We also maintain our MARKET PERFORM calls for most of the banking stocks in our coverage except for RHBBANK where we upgrade to OUTPERFORM due to its attractive valuations

Momentum takes a breather. May 2017 loan growth was slower by 60bps from the previous month to +5.5% YoY at RM1,563m. After a flattish April, loans for May were up marginally by 20bps to +0.2% MoM. In contrast from the previous month, loans were driven by household loans at +5.9% YoY vs business loans at a slower pace by 120bps to +5.1% YoY (Apr 17: +5.9% YoY vs +6.3% YoY). For the first five months of 2017, household loans have been consistent, expanding ~+6.0% indicating resilient consumer spending. The slower loans growth can also be attributed to falling disbursements at 1.3% YoY (Apr 17: +2.7% YoY) vs expanded loan repayments at +6.2% YoY (Apr 17: +2.4% YoY). On an annualized basis, loans growth was at +2.8% YoY, vs Apr 2017 annualized growth of +2.9% YoY.

Mortgages still the driving force in loans but moderate pace continued unabated. As it has been in the last five months, household loans were still driven by residential property albeit at a slower pace of +8.6% YoY (Apr 17: +8.7% YoY) maintaining its single-digit growth since October 2016. Hire purchase was still in negative territory, at -0.3% YoY (Apr 2017: -0.5% YoY). Growth in the business segment was still driven by working capital and non-residential property with the former at a moderate pace of +5.6% YoY (Apr 2017: +7.3% YoY) and the latter albeit slower by 30bps from April 2017 to +4.7% YoY.

Despite the slower loan momentum, loan applications showed the opposite, accelerating sharply to +4.5% YoY (April 2017: +0.6% YoY) thanks to continued demand for household loans. On a MoM basis, there was a sharp rebound in applications at +16.8% MoM (April 2017: -15.6% MoM). Business and household loans applications showed contrasting fortunes with the former continuing its 3rd straight month of decline at 8.1% YoY, but the latter surged sharply to +19.1% YoY (Apr 17: - 2.6% YoY vs +3.5% YoY). The weak business applications were dragged by declining applications for working capital (May 2017: -27.9% YoY vs Apr 2017: -16.1% YoY) to RM13.8b and purchase of fixed assets other than land and building (May 2017: -76.9% YoY vs Apr 2017: +114.9% YoY) to RM0.8b. Surging application for residential property (May 2017: +18.7% YoY vs Apr 2017: +8.7% YoY) and rebound in application for passenger cars (May 2017: +16.9% YoY vs Apr 2017: -1.1% YoY) drove household loan applications.

Approvals fell, dragged by business segment. Loans approvals continued to head south declining by 2.3% YoY (Apr 17: +0.3% YoY). The fall was driven by business loans declining further to 19.5% YoY (vs Apr 2017: -8.4% YoY) but mitigated by household loans, which surged further to +20.9% YoY (vs Apr 2017: +9.5% YoY). Fall in business loans approvals were led by declining approval in working capital of 36.8% YoY (vs Apr 2017: -9.2% YoY) while higher approval for residential property (May 2017: +22.8% YoY vs Apr 2017: +14.1% YoY) supported the expanded approvals for household loans. The fall in approvals was seen in the lower approval rate which slumped by 60bps to 41.4%. Approvals rate for both business and household were at opposite ends with business approvals continued to slump for the 2nd consecutive month by 2ppts MoM to 41.4% while household approvals continued to ease slightly for the 3rd month in a row, up by 50bps to 41.3% from Apr 2017.

Deposits slower, likewise CASA slowed, with excess liquidity continued to shrink YoY. Deposits were marginally slower in May 2017, lower by 10bps to +3.4% or RM1,727b. Likewise, CASA demand slowed by 80bps to +8.9% YoY (Apr 2017: +8.7% YoY) with no change in CASA ratio from the previous month at 26.7%. Deposits were driven by business enterprises and individuals at +4.6% YoY and 5.1% YoY (Apr 17: +4.0% YoY and +5.0% YoY), respectively. As loans moderation outpaced deposits (60bps vs 10bps), loan-to-deposit ratio fell by 35bps to 89.1% in May 2017. System excess liquidity to total deposit ratio base rose by 30bps MoM to 10.9% in May 2017 with YoY system excess liquidity continuing to fall by 280bps to 11.5% YoY to RM188.5b.

Impaired loans moderating. On a YoY basis, asset quality improved, as system net impaired loans fell by 4bps to 1.21%. Growth in impaired loans slowed in May 2017, decelerating by 260bps to 7.1%. Both the household and business segments showed similar fortunes with household slower by 30bps (Apr 2017: +5.7%) but business decelerated faster by 390bps (Apr 2017: +11.9%). Meanwhile, loan loss coverage picked up pace MoM but fell YoY (+72bps MoM and -816bps YoY) at 83.0% as impaired loans growth outpaced provisioning at +7.1% YoY vs -2.5% YoY.

Deposits rate up, so do lending rate. The 3-month deposit rate ticked up slightly by 1bps to 2.94% and the average lending rate for May 2017 was higher by 2bps to 4.61%. Interest spread rose by 2bps to 1.68% in May 2017.

Moderate loans ahead maintained. Our view of moderate loans growth ahead still stands with system loans expected to grow between 5.5% and 6.0% for 2017. Growth will be supported by the resilient household as cost-push inflation is expected to be contained in 2H17. We view the slump in business loan applications with tight business approvals as a temporary blip which is likely to reverse and pick up pace in 2H17 as the economic prospects improved for 2018, coupled by easing of approvals as asset quality looks to be favourable. Despite excess liquidity continuing face downside pressure, we opined that NIM compression will be mild as banks will be able to adjust their lending rates as demand accelerates. We still see limited catalyst to drive earnings growth for the industry materially beyond our current expectation of a mid-to-high single-digit growth.

No favourable catalyst in the short-term ahead, current conditions prevailing…maintain NEUTRAL. We reiterate our NEUTRAL call with as we see no change in the prevailing conditions ahead. There is no concrete catalyst and game changer on the horizon and structural and cyclical headwinds are still prevailing such as; (i) moderating economy, (ii) subdued loans growth, and (iii) downward pressure on NIMs. We maintain our MARKET PERFORM call for most of the banking stocks in our coverage with the exception of RHBBANK where we upgrade to OUTPERFORM as its recent sharp fall in its share price sees an attractive proposition with a potential total return of more than 10%.

Source: Kenanga Research - 3 Jul 2017