Moving into 2H18, loans growth inched higher by 30bps to 5.3% YoY but decelerated by 40bps to +0.3% MoM (June 18: +0.7%). Not surprisingly, loans application and approvals were up (driven by household) boosted by the tax holiday period. 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 maintain a Neutral outlook for the sector. Most of stocks in our banking universe are rated MARKET PERFORM with the exception of AMMB (TP: RM4.50), BIMB HLBANK (TP: RM4.90) and MBSB (TP: RM1.40) which are at OUTPERFORM.

July’s loans continued its upward trend, adding another 30bps to +5.3% YoY (June 18: +5.0% YoY) to Rm1,630b. However, on a MoM basis, loans decelerated by 40bps to +0.3% MoM (June 18: +0.7% MoM). As usual, households segment is still the main driver, turning north for the month adding 30bps to +6.2% YoY (June 18: +5.9% YoY) with the Business segment adding another 20bps to +4.4% YoY (June 18: +4.2% YoY). The uptick in loans can also be attributed to repayments (Jul 18: +17.1% vs. June 18: +16.0%) outpacing disbursements (Jul 18: +15.1% vs June 18: +14.4%) Both business and household disbursements surged forward at +15.1% YoY and +23.0%b YoY, respectively, (vs. June 18: +16.6% and +14.3%, respectively). On an annualized basis, loans slowed by 30bps to +5.0% YoY (June 18: +5.3% YoY).

Overall net financing in the financial sector inched by another 40bps to +6.7% YoY (June 2018: +6.3% YoY as both corporate bonds and loans trek higher by another 60bps and 30bps respectively to +13.0% YoY and 4.7% YoY.

Uptick in business loans was driven by working capital and loans for other purpose +2.9% YoY and +14.7% YoY, respectively, (June 18: +2.3% YoY and +15.4% YoY) while for households, it was driven by residential property and personal financing at +8.3% and +7.7% YoY, respectively (May 18: +8.3% YoY and +6.7% YoY, respectively).

Households applications and approvals up, boosted by the tax holiday period. Business applications fell, moderating July applications. Loans applications surprisingly slowed in July, decelerating to +1.3% YoY (June 18: +13.3% YoY) as business applications fell 12.0% YoY (June 18: +18.0% YoY) mitigated by strong household applications at +15.1% YoY (June 18: +9.1% YoY). Fall in business applications was led by fall in working capital and construction falling by 14.1% YoY and 66.9 % YoY, respectively (June 18: +21.1% YoY and -23.9% YoY respectively). Due to the tax holiday period, applications for residential property and hire purchase continued to be strong at +14.5% YoY and +33.5% YoY, respectively (June 18: +1.2% YoY and +43.5% YoY, respectively).

As with applications, approvals in the system slowed to +0.6% YoY (June 18: +5.4% YoY) dragged by business applications (- 11.6% YoY vs. June 18: +1.3%) while households continued to be strong at +14.1% YoY (June 18: +13.1% YoY) due to the tax holiday period. Working Capital and Construction approvals dragged business approvals falling 18.9% YoY and 47.2% YoY, respectively (June 18: +10.1% and +80.4% YoY, respectively). For households, purchase of residential property approvals rebounded at +1.8% YoY (June 18: -1.6% YoY) with hire purchase approvals continued to remain strong at +57.4% YoY (+58.7% YoY).

Liquidity ample with CASA stable. Deposits outpaced loans in July 2018, growing another 80bps to +5.8% YoY (June 2018: +5.0% YoY) to RM1,808b driven by FDs (+7.9% YoY vs June 18: +7.7% YoY) with CASA moderately slightly by 10bps to +3.8% YoY) and its ratio/total deposits dropping by 40bps to 26.7% (June 18: 27.0%). Both loan-to-deposit ratio (LDR) and loan-to-fund (LTF) ratio remained steady and ample but falling slightly 19bps and 50bps, respectively, to 90.2% and 83.4% with excess liquidity up by 20bps to 9.8%.

Average lending rate continued its improvement, accelerating by another 2bps to 5.07% but 3-month deposit rate inched up another 1bps to 3.16%.

Asset quality improving YoY and MoM. Net impaired loans continued to improve YoY, falling by another 25bps to 0.99% (June 2018: 0.99%) with Gross Impaired Loans (GIL) easing by 10bps YoY to 1.58% (June 2018: 1.59%). Both business and households impaired loans continued to improve on a YoY and a MoM basis, with business easing by 15bps YoY and steady MoM to 2.04% whilst households eased 5bps YoY and 2bps MoM.

The northward trend in loans was not unexpected as moderate inflation, zero tax holiday continued to support the resilient households. Uncertainties in the new government policies coupled with the on-going trade disputes continued to dampen business sentiments as business loans and applications falling with the dampener might still linger until the end of the year. The dampening credit demand might be exacerbated by an increase in corporate bonds as upside pressure on interest rates lessens. While we still maintain our view that banks will still maintain selective asset quality, the improved system asset qualities will support demand from the resilient households ahead especially demand for residential property and personal financing. While CASA ratio and excess liquidity are still the issues of concern, we reckon that NIM will likely to be stable as credit demand will be moderate.

Due to the recent uncertainties both domestically and externally, the banking stocks in our universe have seen moderate depreciation in their prices and most are at MARKET PERFORM (with the exception of AMMB, TP:RM4,50; BIMB, TP: RM4.90; and MBSB, TP: RM1.40 which are all at OUTPERFORM with the sharp depreciation in prices creating attractive propositions). We based our valuations on the banks 5-year average P/BV and PER but with variance of between -0.5 to -1.0 SD to reflect; (i) moderate loans growth and (ii) lower contribution from NOII on internal uncertainties ahead. There are still pockets of undemanding valuations for some of the banking stocks in our universe trading below their mean 5-year average with AMBANK, BIMB and RHBBANK at rock bottom/almost at their 5-year PBV level.

Source: Kenanga Research - 3 Sept 2018