Loans for Jan 2018 inched slightly ahead from Dec but slower on a full-year basis. Although applications and approvals surged ahead, overall approval rate in the system is still tight. We view that loans will be moderate ahead as banks will still be selective on asset quality to minimise traction in credit cost coupled with traction in debt financing. We view the sector as Neutral. Most of the banking stocks in our universe are kept at Market Perform with the exception of AMBANK (TP: RM4.90) and BIMB (TP: RM5.20) which are OUTPERFORMs.

Starting Slowly with persistent demand for corporate bonds. The year started slowly as system loans were at +4.2% YoY, easing by 140bps on a full-year basis, but inching by 10bps (Dec 17: +4.1% YoY to RM1,592b. On a MoM basis, systems loans eased by 60bps, dragged by easing of business loans slowing by 130bps to +0.3% MoM. The slight uptick in loans for January was also helped by loan disbursements (+3.0% YoY vs. Dec 17: +2.1% YoY) outpacing repayments by 160bps (+1.4% YoY vs Dec 17: -3.0% YoY). Household disbursement for January accelerated by 640 bps to +9.9% YoY (Dec 17: +4.9% YoY) on a full-year basis while business disbursements eased by 260bps to +0.7% YoY (vs Dec 17:+1.2% YoY). Nevertheless, the overall financing in the system (banks & development financial institutions) improved by 110bps to +6.7% YoY at RM2,304b on a full-year basis, supported strong growth in corporate bonds (+16.6% YoY) with loans growing at +3.8% YoY (Dec 2017: +15.4% and +3.8% YoY, respectively). Looking ahead, loan growth might still be under pressure as corporates continue to look into the debt market for financing.

No let-up from Household. Into 2018, household loans continued to be resilient and flat YoY and MoM at +6.4% YoY and +0.6% MoM, respectively. Residential mortgages continued to be the main driver at a flattish +8.9% YoY for the 3rd consecutive month while HP eased by another 10bps to 0.5% YoY. Personal financing and credit card usage continued upward momentum rising by another 50bps and 20bps to 4.5% YoY and +3.2% YoY, respectively.

Slight improvement by business loans as it inched by another 10bps to +2.1% YoY. Improvement was underpinned by loans to construction (+4.8% YoY vs Dec 17: +4.6% YoY) and other purposes (+10.4% YoY vs +9.3% YoY) mitigated by falling loans for purchase of fixed assets other than land and building (-11.5% YoY vs Dec 17: -11.4% YoY). Loans for working capital eased by 10bps to +0.8% YoY.

Loan applications started with a bang, rebounding to +25.5% YoY (vs Dec 17: -2.1% YoY) with leading indicators showing positive upside driven by mortgages. Application were driven by both businesses and household at +31.6% YoY and +19.7% YoY, respectively (Dec 17: -9.5% YoY and +5.1% YoY respectively). Business applications were driven by purchase of securities (+71.3% YoY vs. Dec 17: +10.0 YoY) and other purpose (+186.7% YoY vs. Dec 17: +9.9% YoY). Household applications were pushed by demand for purchase of residential property (+19.3% YoY vs. Dec 17: +9.9% YoY) and personal use (+43.8% YoY vs. Dec 17: 22.9% YoY). Household applications were also boosted by demand for HP applications which rebounded to +10.2% YoY (vs. Dec 17: -11.5% YoY).

So did approvals… As with applications, loan approvals surged +26.9% YoY, driven by both business (+38.7% YoY vs Dec 17: +20.3% YoY) and household (+16.0% YoY vs. Dec 17: +8.9% YoY). As with applications, business loans approved were primarily from approvals to purchase securities and other purpose (at +118.7% YoY and +151.2% YoY, respectively, vs. Dec 17: +75.2% YoY and 143.7% YoY, respectively). Approvals in residential property (+20.2% YoY vs. Dec 17: +15.2% YoY) were the driver for household approvals. Despite the surge in approvals, overall for the month of January, loans approval rate in the system fell by 220bps to 42.9% with business easing by 5ppts to 43.9% but household inched slightly by 20bps to 42.0%.

Deposits higher with competition for deposits looming. In contrast to loans, deposits were better, surging by 180bps to +4.4% YoY on a full-year basis (Dec 17: +4.1% YoY) as FD rose +9.3% YoY (vs. Dec 17: +6.3% YoY) with CASA easing at +8.5% YoY (vs. Dec +9.4% YoY). CASA ratio was flat 27.8%. System excess liquidity to total deposit base notched 20bps higher to 10.4% with excess liquidity accelerating to +5.9% YoY (vs. Dec 17: +3.7% YoY). Overall liquidity in the system is still ample with loan-to-fund ratio (LTF) and loan-to-fund-and-equity ratios at 83.6% and 72.9% (vs. Dec 17: 84.0% and 73.7%), respectively. The system loan-to-deposit ratio dipped by 20bps to 89.6%. With the higher demand for loans and deposits, the 3- month deposit rate and the average lending rate for January notched 7 and 2 bps higher at 3.01% and 4.63%, respectively, with the interest rate spread falling by 4bps to 1.62%. Higher loan traction for the year will see competition for deposits putting downside pressure on NIM.

Asset quality stable…Asset quality for January improved/stable with net impaired loans ratio fell by 5bps YoY/flat MoM, respectively. Likewise, gross impaired loans (GIL) improved/stable falling by 8bps YoY/flat MoM at 1.53%. Both business and household asset quality seemed stable at 1.96%/1.13% (vs. Dec 17: 1.95%/1.10%). Loan loss coverage fell 330bps YoY/flat MoM as fall in provisioning (-5% YoY) outpaced impaired loans 1.1% YoY. With stable economy and full employment, asset quality is expected to be stable.

Source: Kenanga Research - 5 Mar 2018