September loans slowed by 60bps to +5.2% YoY. Household loans were still the main growth driver at a resilient +6.3% YoY. Loan applications and approvals continued to ease for the month indicating easing ahead. Asset quality improved and is looking stable. Loans growth is likely to be challenging for 4QCY17. Hence, we maintain our NEUTRAL call for the sector and MARKET PERFORM call for most of the banking stocks in our coverage except for AFFIN, ABMB, AMBANK, CIMB and RHBBANK, which are OUTPERFORM due to their attractive valuations.

Loans continued to ease. September loans continued to ease from the previous month with a 60bps dip to +5.2% YoY at RM1,561b. On MoM basis, it also saw deceleration by 30bps to 0.2% MoM. Household remained resilient at +6.3% YoY (Aug 17: +6.3% YoY) but business loans eased by 120bps to +4.1% YoY. Repayments (+4.7% YoY vs Aug 17: +12.1) outpaced disbursements (-2.5% YoY vs Aug 17: +15.8% YoY) contributed to the slowdown in loans. No change on an annualised basis with loans maintained at +3.5% YoY. Overall financing in the system (banks and development financial institutions) remained stable at +6.4% YoY at RM2,248b as corporate bonds accelerate by 10.9% YoY to RM543m (Aug 17: +9.0% YoY) whilst loans eased by +5.0% YoY to RM1,705b (Aug 17: +5.6% YoY).

Mortgages easing. Household loans are still the driver for September driven by residential property (flat at +8.8% YoY) with HP easing by 30bps to +0.8% YoY. Growth in the business segment was driven by working capital and mortgages at +4.9% YOY and +3.7%, respectively, YoY, with the former easing by 230bps from Aug 2017 and the latter remaining flat for the 3rd consecutive month.

Moving ahead, loans applications continued to ease in September marginally up by +0.3% YoY (August 17: +4.5% YoY) as growth in business applications fell by 1.3% YoY (August 17: 0% YoY) and household applications were significantly slower by +1.9% YoY (August 17: +8.9% YoY). The fall in the business segment was led by working capital (-3.8% YoY vs August 17: - 9.9% YoY) and purchase of securities (-26.0% YoY vs August +30.3% YoY). Application for residential property continued to ease for the 3rd straight month at +7.2% YoY (August 17: +14.3% YoY) with no let-up in dip in passenger car applications falling by 13.9% Yoy (August 17: -5.9% YoY).

Approvals falling. Slowdown in loan momentum ahead will also be exacerbated by falling approvals (-1.7% YoY) with both business and household falling by 0.4% YoY and 3.0% YoY, respectively (Aug 17: +12.0% YoY and +8.2% YoY respectively). Falling business application was dragged by fall in purchase of securities (-14.8% YoY vs August 17: +47.7% YoY) and construction (-56.0% YoY vs August 17: -24.5% YoY) but mitigated by the rebound in approval for working capital (+12.5% YoY vs August (-24.4% YoY). For the household segment, approvals fell, dragged by fall in approval for passenger cars (-15.9% YoY vs August 17: -2.4% YoY) with approvals for purchase of residential property easing to +2.8% YoY (vs August 17: +13.8% YoY). With applications outpacing approvals, approval rate in the system for September was down by 220bps to 42.5% (vs August 17: 44.7%).

Deposits eased but liquidity still at comfortable levels. As with loans, deposits eased by 40bps to +4.6% YoY to RM1,737b. Deposits were driven by business enterprises and individuals at +11.3% YoY and +3.7% YoY (vs August 17: +8.8% YoY and +4.2% YoY), respectively. CASA growth eased slightly by 70bps to +8.8% forcing CASA ratio to ease by 10bps to 26.7%. System excess liquidity to total deposit base improved by 50bps to 10.9% with YoY with YoY fall in system excess liquidity continuing to ease at -0.2% YoY (Aug 17: -0.9% YoY). Overall liquidity in the system is still stable with loan-to-fund ratio (LTF) and loan-to-fund-and-equity ratios at 83.1% and 73.1%, respectively (Aug 17: 83.4% and 73.2%). The system loan-to-deposit ratio was down by 50bps to 89.1% (Aug 17: 89.6%).

Narrowing interest spread. The 3-month deposit rate was up by 4bps to 2.93% and average lending rate for September was up by 1bps 4.62%. Hence, interest spread narrowed by 3bps to 1.69% (August 17: 1.72%).

Mixed asset quality. Asset quality for September improved YoY as net impaired loans ratio fell by 4bps YoY but stable MoM at 1.22%. In contrast, gross impaired loans (GIL) ratio was up by 1bps YoY/flat MoM to 1.67%. GIL for the business segment was 7bps YoY higher to 2.16% (1bps higher MoM) while for household segment, it was 1bps lower YoY at 1.17% (flattish MoM). Meanwhile, loan loss coverage fell YoY (by 820 bps) but improved MoM by 10 bps to 81.4% as impaired loans growth outpaced provisioning at +6.5% YoY vs -3.2% YoY.

Moderation maintained as 4Q looks challenging. For the second quarter in a row, loans growth fell at 0.1% QoQ (2Q17: - 0.2% QoQ). Loan applications and approvals seemed to be on a downward trend with 4Q growth likely challenging as corporates looked to the debt market for financing. On a positive note, household loans are still resilient looking likely to drive 4Q demand, supported by the usual pick-up in growth at the end of the year by corporates. With liquidity at comfortable levels, we opine that NIM compression will be mild underpinned by cheaper cost of funds arising from lesser pressure on deposit rates and upward trend on business deposits.

No favourable catalyst in the short-term, 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 and (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, ABMB, AMBANK, CIMB and RHBBANK, which are at OUTPERFORM as at current share prices as we see attractive proposition with a potential total return of more than 10% each.

Source: Kenanga Research - 2 Nov 2017