OVERVIEW

● Broad money supply (M3) expanded by 6.6% YoY in July (May: +5.7%) its highest in more than three years. M3 added RM8.8b (0.5% MoM) from the previous month thanks to higher net claims on government and private sector which grew 9.0% and 7.0% YoY respectively (June: +4.0% and +6.7% respectively). Additionally, net claims on government and private sector contributed to 0.7 percentage points (ppts) and 7.1 ppts respectively to overall M3 YoY growth in July. Meanwhile, net foreign assets YoY growth slowed to 2.2% (June: 4.0%) as forex reserves continue to fall.

● Narrow money (M1) growth in July was unchanged at 4.7% YoY (June: +4.7%) due to lower currency in circulation which moderated to 1.0% YoY (June: +1.3%). Meanwhile, demand deposits expanded to 3.7% YoY (June: +3.4%).

● Loan growth expanded in July to 5.3% YoY (June: +5.0%), a 9-month high, partly due to an increase in household sector credit growth by 6.0% YoY (June: +5.8%). We believe the tax holiday period may have largely contributed to the higher loan growth triggering higher spending on consumer discretionary goods like cars. The household sector contribution to overall loan growth rose to 3.4 ppts in July (June: +3.3%). Additionally, loan growth for construction sector expanded to 13.6% YoY (June: +11.9%), contributing 0.6 ppts in July (June: 0.5 ppts). By purpose, loan for personal use surged to 7.7% in July (June: +6.9%). Similarly, loan for purchase of securities increased to 6.8% YoY (June: +6.2%), adding 0.3 ppts to overall loan growth. Meanwhile, non-performing loans (NPL) in the banking system remains low and unchanged at 1.6% in July while loan approval rate declined to 43.5% from 48.1% in June.

● Deposit growth expanded by 5.7% YoY (June: +5.1%), the highest since July 2015 on the back of higher fixed deposit instruments and other deposits accepted. Fixed deposit expanded to 7.8% YoY (June: +7.6%), contributing 3.8 ppts to the overall deposit growth (June: 3.7 ppts). Meanwhile, growth of other deposits accepted jumped 10.4% YoY (June: +6.8%), contributing 1.4 ppts to overall deposits YoY expansion. By type, total deposits in Islamic banks posted a sustain double digit growth of 12.4% YoY (June: +13.2%) while commercial banks deposits grew 3.5% YoY (June: +2.4%).

● The banking system Liquidity Coverage Ratio (LCR) expanded to 141.6 (June: 139.7) partly due to expansion in the banking system’s stock of high liquid assets which grew at 1.2% MoM (May: +0.5%). Meanwhile, net cash outflow eased by 0.4% MoM in July (June: +0.4%).

● As the financial sector liquidity remains relatively healthy and stable in spite of the large outflow of portfolio capital, we believe BNM would keep the OPR at 3.25% at its Monetary Policy Committee (MPC) meeting this Wednesday. Although the Sales & Service Tax (SST) starting on 1st September would contribute a higher cost push factor to consumer prices we expect a subdued inflationary trend partly mitigated by the fuel subsidy on RON95. While regional counterparts like the Philippines and Indonesia have raised interest rates to defend their respective currencies and concerns over the contagion brought about by the Turkish lira sharp fall, we believe the country’s fundamentals would continue to support the Ringgit.

Source: Kenanga Research - 3 Sept 2018