Loans for Feb 2018 inched slightly ahead from the previous month but slower on a full-year basis. Leading indicators showed softness ahead as applications fell and approvals lower with overall approval rate in the system 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 AFFIN (TP: RM2.90), AMBANK (TP: RM4.90) and BIMB (TP: RM5.20) which are OUTPERFORMs.

Financing activities are up but slower than a year ago. February’s outstanding loans was up by 30bps to +4.5% YoY (Jan 18: +4.2% YoY with Feb 17: +5.3% YoY) at RM1,596m. On a MoM basis loans slowed by 20bps to 0.3% MoM. YoY loans were driven by both business and households at +6.6% YoY and +2.5% YoY (Jan 18: +2.1% YoY and +6.4% YoY), respectively. Growth in loans can also be attributed to higher disbursements (+6.6% YoY vs Jan 18: +3.0% YoY) outpacing repayments (at +1.9% YoY vs Jan 18: +1.4% YoY). In terms of disbursements, both business and household continued their upward momentum at +3.3% YoY and 16.7% YoY (vs Jan 18: +0.7% YoY and +9.9% YoY), respectively. On an annualized basis loans growth was at 4.5% YoY (vs Feb17 annualized growth of +2.3%). Overall financing in the system grew by another 20bps in Feb 18 to +6.9% YoY with loans inching higher by another 20bps to 4.0% YoY (Feb 17: +5.3%YoY) while corporate bonds eased by 20bps to +16.4% YoY (Feb 17: +6.3% YoY).

Positive uptick in major segments in Household loans. Mortgages continued to be the driver in household loans (+9.0% YoY vs Jan 18: +8.9% YoY) followed by positive upticks in HP, Personal Financing and Credit Card at +0.8% YoY, +4.9% YoY and +3.8% YoY (vs Jan 18: +0.5% YoY, +4.6% YoY and +3.2% YoY), respectively. Working Capital financing, Purchase for Securities and Other Purpose continued to be the driver for business loans at +0.7% YoY, +3.3% YoY and +12.8% YoY (Jan 18: +0.8% YoY, +1.8% YoY and +10.4% YoY), respectively. Loans for purchase of non-residential properties were flat at +2.0% YoY.

Leading indicators showed easing ahead driven by Business. After a stellar rebound in Jan, loan applications fell by 5.8% YoY (Jan 18: 25.5% YoY) dragged by both business and household, falling by 3.8% YoY and 8.0% YoY (Jan 18: +31.6% and +19.7% YoY), respectively. Business applications were dragged by fall in Working Capital applications (-13.2% YoY vs Jan 18: - 3.2% YoY) while fall in application for Purchase of Residential Property and HP dragged Household applications (-11.8% YoY vs Jan 18: +19.3% YoY and -14.9% YoY vs Jan 18: +10.2% YoY), respectively. In contrast, in the last festive season (Feb 17), Business and Household applications were at +18.5% and +24.2%, respectively.

In terms of approval, Business and Households showed contrasting fortunes, with Business falling by 14.0% YoY (vs Jan 18: +38.7% YoY) and Households easing to +7.2% YoY (Jan 18: 16.0% YoY). Falling approvals for Working Capital (-35.0% YoY vs Jan 18: +16.4% YoY) dragged Business applications while HP (+11.6% YoY vs Jan 18: +2.9% YoY) and PF (+24.3% YoY vs Jan 18: +36.3% YoY). Approvals for Household mortgages eased to 1.2% YoY (vs Jan 18: +20.2% YoY). Approvals rate in the system improved by 40bps to 43.9% as Household approvals improved 3.8ppts to 45.8% vs Business approvals falling by 2.9ppts to 41.0%.

Liquidity falling with competition for deposits likely to intensify. In contrast to loans, deposits eased by 20bps to 4.2% YoY (on a full-year basis, surging 2.2ppts) as FDs rose by 1ppts to 10.3% YoY but CASA eased by 2.2ppts to +6.3% YoY. CASA ratio eased by 20 bps to 27.6%. System excess liquidity to total deposit base fell slightly by 10bps to 10.3% with excess liquidity easing by 430bps to 1.6% YoY. However, liquidity in the system is still ample with loan-to-fund ratio (LTF), loan-to-fund-andequity ratios and loan-to-deposit ratio (LDR) at 83.5%, 72.9% and 89.7% (Jan 18: +83.6%, 72.9% and 89.6%), respectively. Average Lending Rate surged by 16bps to 4.879 (boosted by hike in OPR in Jan 18) but continued competition in deposits pushed the 3-month deposit rate by 15bps to 3.16% indicating that NIM might still come under pressure.

Asset quality showed contrasting fortunes for February. Asset quality for February improved/stable further as net impaired loans ratio fell by 7bps YoY/flat MoM respectively. Likewise, gross impaired loans (GIL) improved YoY/MoM, falling by 9/1bps respectively. Business and Household showed contrasting fortunes as their GIL deteriorated/was flattish at 1.98%/1.13% (vs Jan 18: 1.98% and 1.13%), respectively).

Neutral Outlook maintained. We view that the banks will be cautious/selective on asset quality with approval rate still tight and the momentum of system loan growth will likely be moderate for 2018. Stiff price-based competition might trend upwards in 2017 as competition for deposits intensifies for excess and longer-term funding as loan traction gathers momentum. However, better pricing on assets might minimise NIMs compression. Our base case estimate for the system loan growth for 2018 is in the range of 5.0-5.5% driven by a resilient household. We have MARKET PERFORM calls for most of the banking stocks in our universe except for AFFIN (TP: RM2.90), AMBANK (TP: RM4.90) and BIMB (TP: 5RM.20) which are at OUTPERFORM.

Source: Kenanga Research - 2 Apr 2018