OVERVIEW

• M3 growth accelerates. Broad money supply (M3) grew at a 26-month high of 5.3% (Jul: 4.8%) on overall higher growth in net foreign assets and government deposits.
• ...but M1 remains high. Notwithstanding higher M3 growth, narrow money measure or M1 remained high mimicking July’s growth of 10.9%, suggesting that domestic economic activity may have continued to be strong.
• Loan growth steady; deposit growth accelerates. Loan growth stood at a stable 5.8% (Jul: 5.6%) while deposit growth extended its growth streak to achieve a 23-month high largely coming from Islamic banks.
• Slight uptick in interest rates; overall stable monetary conditions. While there was a slight uptick in lending rates, the robust funding structure of banks, well-above the regulatory and prudential limits, suggests that overall monetary conditions remain sound and accommodative of growth.
• No catalyst for revising OPR. We reiterate our stance that manageable inflation rate and receding of growth concern does not signal a revision of the OPR in either direction and hence a likely continuation of the monetary policy committee’s neutral policy stance, keeping the OPR at 3.00%.

M3 growth accelerates. Broad money supply, as defined by M3, grew at a 26-month high of 5.3% (Jul: 4.8%). On a MoM basis, M3 growth rebounded by 0.6% following a contraction of 0.3% in July.

Claims on private sector see stable growth. The speedier M3 growth mainly came from a slower increase in government deposits and higher growth in net foreign assets held by BNM even as net foreign assets held in the banking system declined at a slightly slower pace. Government deposits rose by a more moderate 7.3% (Jul: 19.5%), shaving off a lower 0.3 percentage points from M3 growth (Jul: -0.7%). Net foreign assets held by Bank Negara (BNM) also rose by a higher 10.2% (Jul: 9.2%), adding a modest 2.5 ppts to M3 growth (Jul: 2.2 ppts). Claims on private sector – the largest driver of M3 growth – saw a stable growth rate of 6.1% (Jul: 6.1%).

M1 growth remains high but unchanged from previous month. Narrow money, as defined by M1, however, saw a stable 10.9% growth rate, unchanged from the previous month. The disparity of higher M3 growth amid stable M1 growth was attributable to the faster growth in fixed deposit (a quasi-money item) rather than demand deposits and/or currencies. However, with M1 growth remaining at a high (relative to its moderation observed during May-Jun17), we are encouraged that this may reflect hints of robustness in domestic economic activity. On a MoM basis, M1 was slightly higher at 0.2% after contracting -1.2% in July.

Loan growth steady. August’s loan growth was broadly stable at 5.8% (Jul: 5.6%), generally within the 5.0-6.0% range since Nov16. The slightly higher growth in August came as working capital clocked a higher growth of 7.2% (Jul: 6.9%). By sectors, household sector loans were sustained with a 5.0% growth (Jul: 5.1%) though the electricity, gas and water supply and construction sector saw faster loan growth of 15.4% and 12.4% respectively (Jul: 3.0% and 9.4% respectively). Approval rates were largely unchanged, ticking up to 44.7% (Jul: 43.9%). On a MoM basis, loan growth edged higher to 0.5% (Jul: 0.1%).

Deposit growth higher. Deposit growth accelerated for a second consecutive month to a 23-month high of 5.0% (Jul: 4.3%). Higher deposit growth came about on higher deposit accumulation among both Islamic and commercial banks. Deposits in Islamic banks was the largest driver of deposit growth, contributing 3.2 ppts to aggregate deposit growth (Jul: 2.7 ppts), retaining a double-digit growth of 13.3% for the second consecutive month (Jul: 11.3%). Deposit growth among commercial banks also edged higher with a 2.3% growth (Jul: 1.9%), contributing 1.7 ppts to aggregate deposit growth (Jul: 1.4 ppts). MoM deposit growth was also higher at 0.7% (Jul: 0.0%).

Deposits continue to outpace loans. This resulted in deposits exceeding loans again by RM4.3b (Jul: loans exceeding deposits by RM210m instead). This is overall consistent with our report since June which suggests that deposit growth will equal, if not outpace, loan growth.

Prudent LCR. The Liquidity Coverage Ratio (LCR) of the banking system was overall manageable at 133.3% albeit lower than July’s 137.1%. This came as higher net cash outflow outpaced the growth in the banking stock of high quality liquid assets. LCR remains well-above BNM’s minimum requirement of 90% by Jan18 and, 100% by Jan19 and thereafter.

Stable monetary conditions and financial markets. August was associated with a more benign market perception of the Federal Reserve likely interest rate trajectory, due to softer US inflation. This resulted in overall depreciation of the US dollar vis-à-vis a broad range of currencies, including Malaysia.

Lending rates slightly tighter but still accommodative. Lending rates were overall stable with the weighted average lending rates of commercial banks was unchanged at 4.61%. However, the weighted average base rates continued to edge up to 3.64% (Jul: 3.62%) though this does not represent a significant upward shift or a broader trend. Overall, these stable rates, along with prudent banking sector funding structure suggests that the monetary eco-system remains overall healthy and accommodative of Malaysia’s growth trajectory.

OUTLOOK

Overall caution to continue into September. While Malaysia’s net foreign assets continued to see a modest 2.8% growth in August (Jul: 1.9%), volatility remains the mainstay with unresolved geopolitical tensions between the US and North Korea likely to characterise geopolitical risks in the Asian region for September and likely for 4Q17.Even without tensions in North Korea, we are likely to see a more hawkish overtone by the US Federal Reserve to weigh against sentiments in Asia – and by extension Malaysia. Combined with the Fed’s announcement of a gradual balance sheet reduction starting October, we expect net foreign assets to ease somewhat with some global investors likely to pre-empt tighter liquidity moving forward.

Still accommodative monetary conditions. Despite the uptick in deposit growth, we are not seeing significantly higher rates overall, suggesting that monetary conditions have remained broadly stable and consistent with a growing economy. We do not see any substantial deterioration of monetary conditions moving into September.

OPR likely to remain at 3.00%. BNM’s monthly highlight noted higher inflation of 3.7% (Jul: 3.2%) from higher global oil prices though it was quick to note that underlying inflation remains low. Indeed, core inflation slowed to 2.4% (Jul: 2.6%) pointing to stable demand-pull factors yet not a strong enough reason to trigger a policy change. The highlight did not identify any other factors that may suggest a movement away from the prevailing neutral policy. On the back of a moderating growth trend in the 2H17 amidst expected slowing domestic demand, we believe that the Monetary Policy Committee will be more inclined to maintain the overnight policy rate (OPR) at 3.00% for the rest of 2017.

Source: Kenanga Research - 2 Oct 2017