Loan growth eased slightly in July, by 10bps from the previous month to +5.6% YoY. As in previous month, loans were driven by household loans, which eased to +6.3% YoY vs business loans that receded at 4.9% YoY. Despite hiccup in momentum, demand was up with approvals picking up YoY, indicating favourable pick-up in loans ahead. Business loans are likely to pick up pace 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, AFG, AMBANK and RHBBANK, which are OUTPERFORMs due to their attractive valuations.

Loans growth easing. July loan growth eased slightly by 10bps from the previous month to +5.6% YoY at RM1,549m. After accelerating by 40bps in June, loans in July eased by 50bps to +0.1% MoM. As in June, loans were driven by household loans at +6.3% (easing by 10bps) YoY vs business loans easing by another 10bps to +4.9% YoY (June 17: +6.4% YoY vs +5.0% YoY). The easing in loan growth can also be attributed to higher repayments at +15.5% YoY (June 17: +3.2% YoY) outpacing loans disbursements at +13.3% YoY (June 17: +4.1% YoY). Similar trend can be seen on an annualized basis, easing 40bps to +3.1% YoY for July 17.

Household mortgages flat but still the driver. As was the case in 1H17, household loans were still driven by residential property though flat at +8.9% in July, with hire purchase easing by 30bps to +1.0% YoY (June 17: +1.3% YoY). Growth in the business segment was still driven by working capital and purchase of securities at +6.9% YoY and +6.0% YoY, respectively, (June 17: +7.1% YoY and +4.9% YoY, respectively), with the former moderating by 20bps but the latter accelerating by 110bps. Loans for purchase of non-residential property continued to ease (by 10bps) for the 4th straight month at +3.7% YoY.

Despite the ease in momentum, loans applications picked up pace in July, rebounding to +22.9% YoY (June 17: -15.3% YoY) as both business and household applications rebounded to +19.6% YoY and +26.4% YoY, respectively (June 17: -26.4% YoY and -1.9% YoY, respectively) as business picked up pace following the festive season in June. The sharp rise can also be seen on a MoM basis where applications rebounded to +16.5% MoM (June 2017: -14.6% MoM).

Approvals better YoY but tightening MoM. As with applications, loan approvals continued to pick up pace surging by +24.8% YoY (June 17: +9.6% YoY) driven by both business and household loans at +26.0% YoY and +23.6% YoY, respectively (June 17: +19.5% YoY and -0.8% YoY, respectively). Business loan approvals were driven by approvals in construction and “other purposes” at +112.8% YoY and 28.3% YoY, respectively (June 17: -39.0% YoY and +117.0% YoY, respectively. For the household segment, growth was supported by growth in residential properties accelerating faster to +26.9% YoY (June 17: +6.1% YoY). While approvals surged on a YoY basis, approval rate seemed to be tightening as rate fell by 8ppts MoM to 43.9%. Approval rates for both business and household were on a similar trend falling by 14ppts MoM to 46.8% and 250 bps MoM to 41.1%, respectively.

Deposits surging in July 2017 with fall in system excess liquidity eased. Deposits surged 130bps MoM/YoY to 4.3% for July 2017 to RM1,726b. Deposits were driven by business enterprises and individuals at +8.5% YoY and +4.0% YoY, respectively, (June 17: +5.5% YoY and +3.9% YoY, respectively). With strong support from business enterprises, CASA improved by 190bps MoM to +9.7% YoY (again are u referring to MoM or YoY?) but CASA ratio declined by 20bps MoM to 26.9%. System excess liquidity to total deposit base remained flat in July 17 at 10.2% but YoY fall in system excess liquidity eased by -5.7% YoY (Jun 17: -15.8% YoY). Likewise, funding in the system were comfortable as Loan-to-deposit ratio was flat at 89.8% in July 2017 with loan-to-fund ratio at 83.5%.

Impaired loans ticking up MoM. Asset quality improved YoY as net impaired loans ratio fell by 7bps to 1.23% but ticked up by 3bps MoM with growth in impaired loans accelerating by 180bps MoM to +5.6% YoY. Both business and households showed contrasting fortunes with business showing faster impairments by 310bps (June 17: +3.2% YoY) while households eased by 360bps (June 17: +8.0% YoY) Meanwhile, loan loss coverage fell both MoM and YoY (-194bps MoM and -739bps YoY, respectively) as impaired loans growth outpaced provisioning at +5.6% YoY vs -3.1% YoY.

Contrasting rates. The 3-month deposit rate fell by 5bps to 2.88% but the average lending rate for July 2017 surged by 14bps to 4.61%. Interest spread surged by 17bps to 1.73% in July 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. The rise in applications beckons a positive momentum ahead as both business and households’ applications picked up. The rise in approvals for both business and household is encouraging and we expect conditions to be favourable going forward as asset quality looks to be improving. With excess liquidity easing, we opine that NIM compression will be mild as banks will be able to adjust their lending rates as demand accelerates as seen in the surge in average lending rates for July. 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, AFG, AMBANK and RHBBANK are at OUTPERFORM as at current share prices, we see attractive proposition with a potential total return of more than 10% each.

Source: Kenanga Research - 5 Sept 2017