OVERVIEW

● Broad money supply (M3) expanded to 5.7% YoY in June (May: +5.5%) on rise in net claims, higher loans and a lower base a year ago. Net claims on government and private sector contributed 0.3 percentage points (ppts) (May: +0.0 ppts), and 6.7 ppts (May: +6.3 ppts) respectively to overall M3 YoY growth. Net foreign assets contribution to M3 growth in June also expanded by 1.2 ppts from 0.7 ppts in May. However, on MoM basis M3 fell 0.2% or RM3.2b, its first decline since July last year.

● Narrow money (M1) growth in June moderated to a 19-month low at 4.7% YoY (May: +6.7%) due to lower demand deposits and currency in circulation. Growth in demand deposits continue to moderate for the sixth consecutive month to 3.4% YoY in June (May: +4.4%) while currency in circulation slowed to 1.3% YoY in the same period (May: +2.3%).

● Loan growth expanded marginally in June to 5.0% YoY (May: +4.9%), at a 9-month high mainly contributed to increase in household credit taking advantage on the tax holiday. The household loans contribution to overall loan growth expanded to 3.3 ppts in June (May: +3.2%). Loan growth for personal use surged to 6.9% in June (May: +6.1%), a 27-month record high. Credit card loans contributed 1.0 ppt to overall loan growth. By sectors, loans growth remains higher for electricity, gas & water supply, construction and other sectors at 34.2%, 10.7% and 50.1% respectively year-on-year. Meanwhile, non-performing loans (NPL) in banking system remains low and unchanged at 1.6% in June while loan approval rate picked up, rising to 48.1% from 45.8% in May.

● Deposit growth expanded by 5.1% YoY (May: +4.8%), mainly contributed by higher fixed deposit instruments and other deposits accepted. Fixed deposit contributed by 3.7 ppts to the overall deposit growth. Other deposits accepted jumped 6.8% YoY (May: +1.6%), contributing 0.9 ppts to overall deposits YoY expansion. By type, total deposits of Islamic banks posted a double digit growth of 13.2% YoY (May: +15.6%) compared to 2.4% (May: +1.2%) in commercial banks.

● The banking system Liquidity Coverage Ratio (LCR) eased to 139.7 (May: 142.1) partly due to net cash outflow of 2.2% MoM in June (May: +2.6%). Meanwhile, the banking system’s stock of high liquid assets grew at a slower pace of 0.5% MoM (May: +0.8%).

● As the financial sector liquidity remains relatively healthy and stable, we believe BNM would retain the OPR at 3.25% mainly to support economic growth. Subdued inflation growth trend due to the zero rating of the Goods and Services Tax gave further justification to let the OPR remained unchanged. While regional counterparts like the Philippines and Indonesia have tightened their interest rates to defend their respective currencies, we believe the Ringgit remained relatively undervalued. Hence, our USDMYR year-end target remained unchanged at RM4.05.

Source: Kenanga Research - 1 Aug 2018