Loans growth in May 18 inched slightly ahead by 10bps by 4.9% YoY but dipped 10bps MoM to 0.3% MoM. Loan applications and approvals fell for May 2018 due to post GE14 sentiments, but we expect pickups in the following months ahead. Our view of moderate loans (with a downside bias) ahead still holds due to the absence of clear catalyst with volatile domestic and external conditions still prevailing; thus, we are maintaining a Neutral outlook for the sector. Most of stocks in our banking universe are at OUTPERFORM with only ABMB (TP: RM4.40), HLBANK (TP: RM18.7) and PBBANK (TP: RM24.65) at MARKET PERFORM.

Loans inched higher as corporate bonds slowed. May’s outstanding loans inched slightly by 10bps to +4.9% YoY (Apr 2018: +4.8% YoY) to RM1,615m. On a MoM basis, loans dipped by 10bps to +0.3% MoM (Apr 2018: 0.4% MoM). Household loans were still the main driver despite dipping by 30bps to +6.4% YoY (Apr 2018: +6.7% YoY) but business loans continued its uptrend for the 2nd consecutive month, surging by 50bps to +3.5% YoY (Apr 2018: +3.0% YoY). The slight uptick in loans can also be accounted by the lower disbursements (+2.7% YoY vs. Apr 2018: +11.0% YoY) against higher repayments of +3.2% YoY (vs. Apr 2018: +7.8% YoY). While May 2018 business disbursements slowed to +5.4% YoY (Apr 2018: +8.5% YoY), household disbursements fell 4.7% YoY (Apr 2018: +18.5% YoY). On an annualized basis, loans outstanding loans fell by 20bps to +4.6% YoY (vs Apr 2018 annualized growth of +4.8% YoY). Overall net financing in the financial sector fell by 40bps to +6.2% YoY (Apr 2018: +6.6% YoY) dragged by deceleration in corporate bonds to +12.2% YoY (vs Apr 2018: +14.3% YoY) while net financing inched slightly by 10bps to +4.3% YoY (Apr 2018: +4.2% YoY).

Mortgages and personal financing continued to be steady. Deceleration in household loans were across the board with mortgage and hire purchase slowing by 10bps and 40bps, respectively, to +8.8% YoY and +0.2% YoY respectively (Apr 2018: +8.9% YoY and +0.6% YoY) with the exception of personal financing which remained stable at +6.0% YoY (Apr 2018: +6.0% YoY). Rise in business loans were driven by: (i) working capital (+2.3% YoY vs. Apr 2018: +1.3% YoY), (ii) non-residential mortgages at +2.2% YoY (vs. Apr 2018: + 2.0% YoY), and (iii) purchase of securities at +5.5% YoY (Apr 2018: +4.2% YoY).

Approvals and applications saw deceleration led by households. Following the dramatic GE14 results, loan applications fell dramatically in May falling by 9.2% YoY (Apr 2018: +20.1% YoY) as both business and household applications fell by 6.9% YoY and 11.2% YoY (Apr 2018: +34.1% YoY and +8.5% YoY, respectively. On a MoM basis, loans applications which have been slowing since March, fell 11.7% MoM for May (Apr 2018: +1.4% MoM). Fall in construction and purchase of securities (at 49.2% YoY and 41.1% YoY vs. Apr 2018: +0.7% YoY and +18.4% YoY, respectively) dragged business loan applications while household applications were primarily dragged by fall in mortgages at 15.4% YoY (Apr 2018: +6.4% YoY). As with the dramatic fall in applications, approvals slowed dramatically at +0.6% YoY (Apr 2018: +21.6% YoY) as business approvals slowed to +14.2% YoY (Apr 2018: 34.5% YoY) while household approvals fell 11.7% YoY (Apr +10.1% YoY). Slowdown in business approvals were dragged by fall in construction at 38.3% YoY (Apr 2018: +65.9%). Fall in household approvals were across the board, led by fall in mortgage and HP at 13% YoY and 7.5% YoY, respectively (Apr 2018: +7.1% YoY and +7.9% YoY, respectively. However, as loans applications were outpaced by approvals, approval rates for May 2018 were 330bps higher to 45.8%. Business loans saw approvals rate rising by 720 bps to 50.8% (Apr 2018: 43.6%) but household approval rate remained steady at 41.1%.

Liquidity shrinking but remained ample. With loans inching up slowly, intake of deposits slowed by 70bps to +4.9% YoY (Apr 2018: +5.6% YoY with both intake of CASA and FDs slowing at +5.1% YoY and +3.5% YoY, respectively (Apr 18: +6.0% YoY and +5.1% YoY respectively). CASA ratio continued to remain steady at 26.8%. As loans outpaced deposits, excess liquidity of total deposits in the system fell by 30bps to 10.9% (Apr 2018: 11.2%). Both loan-to-deposit (LDR) and loan-to-fund ratios (LTF) remained steady 89.1% and 83.0% (Apr 2018: 88.7% and 82.7%, respectively). Average lending rate improved by 7bps to 4.97% with 3-month deposit rate falling by 2bps to 3.15%. With liquidity shrinking, downside pressure on NIMs may rear its ugly head again.

YoY asset quality improved but slight uptick on a MoM basis. Net impaired loans remained steady at 0.97% easing by 24bps YoY (Apr 2018: 0.97%) with Gross Impaired loans (GIL) easing by 7bps YoY to 1.60% (Apr 2018: 1.58%). On a YoY basis, business and household GILs eased by 10bps and 3bps to 2.05% and 1.15%, respectively, while on a MoM basis, there was uptick in household loans by 4bps to 1.15% while business remained steady at 2.05% (Apr 2018: 2.05% and 1.11%, respectively). While post GE14 sentiments seemed to have taken its toll in May with both applications and approvals falling, we do expect pickups in the following months, especially from household with the stable energy prices and zero-rated GST (before the implementation of SST). We still view that systems loans growth to moderate at 5-5.5% with a downside bias due to the expected revision in govt expenditure but supported by resilient households. On a positive note, system asset qualities are improving, but we maintain our view that banks will maintain selective asset quality, mindful of volatile domestic and external environment ahead. We maintain our Neutral stance for the sector.

Source: Kenanga Research - 2 Jul 2018