October loans growth slowed by 60bps to +4.6% YoY. Household loans were still the main growth driver at a resilient +6.3% YoY. While loan applications surged ahead, approvals continued to slide for the month. On a positive note, asset quality improved and is looking stable. 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.

Easing continues. October loans continued to ease (for the 4th consecutive month) from the previous month with another 60bps dip to +4.6% YoY at RM1,562b. On a MoM basis, loans saw a deceleration by 10bps to 0.1% MoM. Household remained resilient at +6.3% YoY (for the fourth straight month). Business loan eased by 110bps to +3.0% YoY. Repayments (+17.3% YoY vs. Sep 17: +4.7%) outpaced disbursements (+8.4% YoY vs. Sep 17: -2.5% YoY) contributed further to weaker loans. On an annualised basis, loans grew by +3.2% easing by 30bps from the month before. Overall financing in the system (banks and development financial institutions) eased by 20bps to +6.2% YoY at RM2,260b as growth in corporate bonds +12.0% YoY to RM552.9m outpaced loans growth of 4.4% to RM1,707m.

No let-up from household. Household loans were still the driver for October driven by residential property (up 10bps to +8.9% YoY) with HP still easing by 20bps to 0.6% YoY. Working capital and mortgages were still the driver for business loans, growing at +4.3% YoY and +3.2% YoY, respectively, with the former easing by 60bps from Sep 2017 and the latter easing by 50bps.

Reversing momentum. Loans application reversed momentum, surging by +12.8% YoY (Sep 17: +0.3% YoY) as applications for both business and household surged ahead at +14.4% YoY and +11.2%, respectively. (Sep 17: -1.3% YoY and +1.9% YoY respectively). The rebound in the business segment was led by working capital (+8.4% YoY vs Sep 17: 3.8% YoY) and construction (+44.9% YoY vs Sep 17: +1.1% YoY). Application for residential property is still the driver for household applications surging at +18.9% (vs Sep 17: +7.2% YoY). Application for passenger cars continued its declining momentum (albeit easing) falling by 5.3% YoY (Sep 17: -13.9% YoY).

Falling approvals gaining momentum. Loans approval continued to trek southwards falling by 2.1% YoY (Sep 17: -1.7% YoY) led by falling business approvals (-11.4% YoY vs Sep 17: -0.4% YoY) as household approvals rebounded to +10.1% YoY (Sep 17: -3.0% YoY). Falling business approvals were dragged by fall in working capital (-6.3% YoY vs Sep 17: +12.5% YoY). The rebound in households was led by surging approval of residential property (+14.5% YoY vs Sep 17: +2.8% YoY). Approval rate in the system was flat at 42.5% in October.

Deposits & liquidity improving. Despite easing loans, deposits improved ahead by 20bps to +4.8% YoY to RM1.743b. Deposits were driven by business enterprises and individuals at +11.2% YoY and +3.8% YoY (vs Sep 17: +11.3% YoY and +3.7% YoY), respectively. CASA growth gained momentum 70bps to +9.5% forcing CASA ratio to improve by 20bps to 26.9%. System excess liquidity to total deposit base improved by 54bps to +11.3% YoY with excess liquidity registering positive traction (since June 15) to +6.2% YoY. Overall liquidity in the system is still stable with loan-to-fund ratio (LTF) and loan-to-fund-andequity ratios at 83.0% and 72.9%, respectively (Sep 17: 83.1% and 73.1%). The system loan-to-deposit ratio was down by 40bps to 88.7%.

Rising interest spread. The 3-month deposit rate was up by 1bps to 2.94% and average lending rate for October was up by 2bps 4.64%. Hence, interest spread expanded by 2bps to 1.71%.

Asset quality improving. Asset quality for October improved YoY as net impaired loans ratio fell by 1bps YoY and 3bps MoM at 1.19%. In contrast, gross impaired loans (GIL) ratio was flat YoY/-2bps MoM to 1.65%. GIL for both business and household fell by 2bps MoM to 2.14% and 1.15%, respectively. Meanwhile, loan loss coverage fell YoY (by 170 bps) and higher by 100bps MoM 82.1% as impaired loans growth outpaced provisioning at +4.8% YoY vs. +2.6% YoY.

System loans beneath 5%. We opine that system loans growth will be beneath 5% for FY17 underpinned by easing of business loans. 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 improving and 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… maintain NEUTRAL. We reiterate our NEUTRAL call. No favourable horizon ahead in the absence of concrete catalyst. We continued to see: (i) moderating economy and (ii) moderate loans growth. 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 - 4 Dec 2017