Loan growth accelerated slightly in June, by 20bps from the previous month to +5.7% YoY. As in the previous month, loans were driven by household loans at +6.4% YoY vs business loans at +5.0% YoY. Despite the faster momentum, demand was down but approvals eased, indicating 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 of 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 AFFIN and RHBBANK where we maintained OUTPERFORM due to their attractive valuations

1H17 loans driven by consumer spending. June 2017 loans growth was up by 20bps from the previous month to +5.7% YoY at RM1,548. After a marginally flat May, loans in June were up by 40bps to +0.6% MoM. As in the previous month, loans were driven by household loans at +6.4% YoY vs business loans at a slower pace by 10bps to +5.0% YoY (May 17: +5.9% YoY vs +5.1% YoY). For 1H17, household loans have been consistent, expanding ~+6.0% indicating resilient consumer spending. The slightly faster loans growth can also be attributed to higher disbursements at +4.1% YoY (May 17: +1.3% YoY) vs slower loan repayments at +3.2% YoY (May 17: +6.2% YoY). On an annualized basis, loans growth was at +3.5% YoY, vs May 2017 annualized growth of +2.8% YoY.

Mortgages still the driving force in loans and continued unabated. As was the case in the last six months, household loans were still driven by residential property accelerating by another 30bps to 8.9% YoY in June, consistently performing ~+9% in the first half of 2017 (vs household loans of +~6%). Hire purchase rebounded +1.3% YoY in June (May 2017: - 0.3% YoY); its first foray in the positive territory since June 2016. Growth in the business segment was still driven by working capital and non-residential property with the former at a moderate pace of +7.1% YoY (May 2017: +5.6% YoY) and the latter albeit slower by 90bps from April 2017 to +3.8% YoY.

Despite the faster loan momentum, loan applications showed the opposite, decelerating sharply to -15.3% YoY (May 2017: +4.5% YoY) attributed to falling demand for business loans. The sharp fall can also be seen on a MoM basis, applications fell at 14.6% MoM (May 2017: +16.8% MoM). Business and household loans applications showed the same fortunes with the former continuing its 4th straight month of decline at 8.1% YoY, and the latter fell unexpectedly by 1.9% YoY (May 17: -8.1% YoY vs +19.1% YoY) after 4 consecutive months of growth. The weak business applications were dragged by declining applications for working capital (June 2017: -25.9% YoY vs May 2017: -27.9% YoY) to RM13.7b and construction (June 2017: - 45.5% YoY vs May 2017: +41.3% YoY) to RM3.6b. Fall in application for passenger cars (June 2017: -22.3% YoY vs May 2017: +16.9% YoY) drove down household loan applications.

Approvals up, driven by business segment. Loan approvals rebounded by +9.6% YoY (May 17: -2.3% YoY). The rebound was driven by business loans rebounding to +19.5% YoY (vs May 2017: -19.5% YoY) but mitigated by household loans, which sagged marginally by 0.8% YoY (vs May 2017: +20.9% YoY). Rebound in business loans approvals were supported by rebound in approval in working capital and purchase of securities at 31.1% YoY and 37.8% YoY, respectively (May 2017: -36.8% YoY and -5.2% YoY, respectively) while falling approval for passenger car (June 2017: -15.4% YoY vs May 2017: +18.1% YoY) drove down the approvals for household loans. The rise in approvals was seen in the better approval rate which rose by 10ppts to 51.6%. Approvals rate for both business and household segments were on similar trends with business approvals easing by 19ppts MoM to 60.5% while household approvals continued to ease slightly for the 4th month in a row, up by 230bps to 43.6% from May 2017.

Deposits slower, likewise CASA slowed, with excess liquidity continued to shrink YoY. Deposits were marginally slower in May 2017, lower by 40bps to +3.0% or RM1,725b. Likewise, CASA demand slowed by 110bps to +7.8% YoY (May 2017: +8.9% YoY) but as CASA growth outpaced deposits growth, CASA ratio was up by 40bps to 27.1%. As loans acceleration was slower than deposits deceleration (20bps vs 40bps), loan-to-deposit ratio inched further by 67bps to 89.8% in June 2017. System excess liquidity to total deposit ratio base fell by 70bps MoM to 10.2% in June 2017 with YoY system excess liquidity continuing to fall by 430bps to 15.8% YoY to RM176.7b.

On a YoY basis, asset quality improved, as system net impaired loans fell by 7bps to 1.20%. Growth in impaired loans slowed in June 2017, decelerating by 230bps to 4.8%. Both the household and business segments showed contrasting fortunes with household showing faster impairments by 160bps (May 2017: +5.4%) and business decelerated by 320bps (May 2017: +8.0%). Meanwhile, loan loss coverage picked up pace MoM but fell YoY (+20bps MoM and -626bps YoY) at 83.2% as impaired loans growth outpaced provisioning at +4.8% YoY vs -2.5% YoY.

Deposits rate down so do lending rate. The 3-month deposit rate ticked down slightly by 1bps to 2.93% and the average lending rate for May 2017 was also lower by 14bps to 4.47%. Interest spread fell by 14bps to 1.54% in June 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 as a temporary blip which is likely to reverse and pick up pace in 2H17 as the economic prospects improve for 2018. The ease of approvals for both business and household is encouraging and we expect conditions to be favourable going forward as asset quality looks to be improving. Despite excess liquidity continuing to face downside pressure, we opine 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 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 NIM. We maintain our MARKET PERFORM call for most of the banking stocks in our coverage with the exception of AFFIN and RHBBANK where we maintained OUTPERFORM as at current share prices, we see attractive proposition with a potential total return of more than 10% each.

Source: Kenanga Research - 1 Aug 2017