Loans continued to ease in November by 70bps to +3.9% YoY. Household loans were still the main growth driver at a resilient +6.4% YoY while Business eased to +1.6% YoY. On a positive note, loan approvals reversed its downward trend. We maintain our NEUTRAL call for the sector and MARKET PERFORM call for most of the banking stocks in our coverage except for AFFIN, AMBANK, and RHBBANK, which are OUTPERFORM due to their attractive valuations.

No let-up in easing. November sees further easing of outstanding loans, dipping by 70bps from the previous month to +3.9% YoY to RM1,571b. On a MoM basis, loans inched higher by 20bps to +0.3% MoM. Household remained resilient at +6.4% YoY (Oct 17: +6.3%) while Business loans continued to ease for the 3rd straight month at +1.6% YoY (Oct 17: +3.0% YoY). Repayments (+9.9% YoY vs. Oct 17: +17.3% YoY) outpaced disbursements (+1.8% YoY vs Oct 17: +8.4% YoY) which contributed further to the slower loans. On an annualised basis, loans grew by 10bps from the previous month to +3.3%. Overall financing in the system (banks and development financial institutions) eased by 40bps to +5.8% YoY at RM2,267b despite corporate bonds improving by another 80bps (from the previous month) to +12.8% YoY mitigated by slower loans by 70bps to +3.7% YoY. On an annualized basis loans grew by another 10bps to +3.3%.

Resilient household still driven by residential property (at a flattish +8.9% YoY) with HP inching up by 10bps to +0.7% YoY. Business loans were dragged by fall in purchase of fixed assets (-13.7% YoY vs. Oct 17: -8.2% YoY) and other purposes (-2.4% YoY vs. Oct 17: -3.3% YoY). Loans for non-residential property continued to ease to +2.4% YoY (vs. Oct 17: +3.2% YoY).

Applications continued its upward momentum. Loans application maintained its momentum upwards by +15.8% YoY (Oct 17: +12.8% YoY) as applications for both business and household surged ahead at +18.9% YoY and +12.5% YoY (Oct 17: +14.4% YoY and +11.2% YoY), respectively. Application for purchase for securities (+49.5% YoY vs. Oct 17: -7.4% YoY) and other purposes (+61.6% YoY vs Oct 17: +28.4% YoY) led the way for business loans while for household applications, residential property continued to be the driver at +19.1% YoY (vs Oct 17: +18.9% YoY). Application for passenger cars continued its declining momentum, falling by 5.5% YoY (Oct 17: -5.3% YoY).

Reversing momentum. Loans approvals reversed its downtrend from the previous month, rebounding at +22.3% YoY (Oct 17: -2.1% YoY) with business loans approvals rebounding +28.5% YoY (Oct 17: -11.4% YoY) and household approvals improving at +15.6% YoY (vs Oct 17: +10.1% YoY). Business approvals were led by construction at +206.5% YoY (coming from a low base) vs. Oct 17: -3.5% YoY). Mortgages led household approvals at +18.2% YoY vs. Oct 17: +14.5% YoY. Approval rate in the system improved by 180bps to 44.3% in November.

Deposits continued to rise. Despite loans easing, deposits improved ahead by another 20bps to +5.0% YoY, to RM1.754b. Deposits were driven by business enterprises (+11.1% YoY vs Oct 17: +11.2% YoY) with deposits from individual flattish at +3.8% YoY. Despite CASA (+7.9% YoY vs Oct 17: +9.5% YoY) outpacing deposits, CASA ratio fell by 10bps 26.8%. System excess liquidity to total deposit base was flat at +11.3% YoY with excess liquidity continued to register positive traction to +14.3% YoY (vs Oct 17: +6.2%). Overall liquidity in the system is still stable with loan-to-fund ratio (LTF) and loan-to-fund-andequity ratios at 83.4% and 73.2% (vs Oct 17: 83.0% and 72.9%), respectively. The system loan-to-deposit ratio remained flat at 88.7%.

The 3-month deposits rate remained flat at 2.94% and the average lending rate for November fell by 3bps to 4.61%. Interest rate spread narrowed by 4bps to 1.67%.

Asset quality improving. Asset quality for November improved YoY as net impaired loans ratio fell by 5bps YoY and 4bps MoM to 1.15%. Likewise, gross impaired loans continued to improve, falling by 2bps YoY/-4bps MoM to 1.61%. GIL for both business and household fell by 7bps/1bps MoM to 2.07% and 1.14%, respectively. Loan loss coverage fell by 710bps YoY/improving by 190bps MoM to 84.0% as impaired loans growth outpaced provisioning at +2.9% YoY vs. -5.1% YoY.

NEUTRAL call maintained. System loans growth looks likely to end 2017 at around 4% YoY underpinned by soft business loans compounded by the higher demand for corporate bonds as corporates look to mitigate the prospect of interest rate hikes in 2018. We maintain our NEUTRAL call for the sector as we see moderate loans growth ahead with corporates looking into the debt market for further financing. We also expect approval rate to continue to moderate as banks continue to be risk averse (mostly from the household segment) as interest rates rise. While we maintain our MARKET PERFORM call for most of the banking stocks in our universe, the sharp depreciation in some of the financial stocks points to some attractive propositions in the banking sector. Our OP calls are AFFIN, AMBANK, and RHBBANK. We downgrade HLBANK to UNDERPERFORM as valuations are stretched.

Source: Kenanga Research - 2 Jan 2018