OVERVIEW

● Broad money supply (M3) grew by 6.4% YoY in August (July: +6.6%). M3 added RM7.2b (+0.4% MoM) largely due to higher net claims on private sector which expanded by 10.2% (July: 9.0%), contributing 7.5 percentage points (ppts) to M3 growth. Net claims on government was up by 7.4% YoY (July: +7.0%), contributing just 0.8 ppts to M3 YoY growth. In line with continued outflow of capital, net external reserves fell by 0.3% YoY (July: +2.2%).

● Narrow money (M1) growth in August moderated to 4.4% YoY (July: +4.7%), contributing just 1.0 ppts to the overall M3 growth mainly due to the slower currency in circulation which grew by 2.8% YoY (July: +4.3%). Meanwhile, demand deposits growth increased by 4.9% YoY (July: 4.8%). Currency in circulation and demand deposits contribution to overall M3 growth was unchanged at 0.2 and 0.9 ppts respectively in August.

● As expected, the tax holiday period (June to August) continued to contribute to the higher loan growth as spending on consumer discretionary goods increased. Loan growth in August expanded by 5.4% YoY (July: +5.3%), a 12- month high largely due to an increase in household sector credit growth which edged up by 6.1% YoY (July: +6.0%), contributing 3.5 ppts to overall growth (July: 3.4 ppts). Additionally, loan growth for the construction sector expanded by 14.7% YoY (July: +13.6%), contributing 0.7 ppts in August growth (July: 0.6 ppts). By loan purpose, purchase of transport vehicles increased by 0.3% in August (July: -0.3%) as mainly car buyers took the opportunity of the zerorated Goods & Services Tax (GST) before Sales & Service Tax (SST) takes into effect on September 1. Loan for purchase of residential property grew by 8.2% YoY (July: +8.3%), contributing 2.7 ppts to overall loan growth in August. Meanwhile, non-performing loans (NPL) in the banking system remains low and unchanged at 1.6% while loan approval rate tumbled to 42.4% in August from 43.5% in July, a 15-month low.

● Deposit growth unchanged at 5.7% YoY, with fixed deposits continue to lead, up by 8.4% YoY (July: +7.8%), contributing 4.1 ppts to overall deposit growth (July: 3.8 ppts). Meanwhile, foreign currency deposits continued its downtrend, falling 6.9% YoY (July: -5.3%). Total deposits in Islamic bank continue to post a double-digit growth since July 2017, expanding by 13.4% YoY in August (July: +12.4%) while commercial banks deposits growth moderated to 3.0% YoY (July: +3.5%).

● The banking system Liquidity Coverage Ratio (LCR) expanded to 143.6 in August (July: 141.5) due to the rise in the banking system’s stock of high-quality liquid assets which grew by 2.3% MoM (July: +1.2%).

● Following the reintroduction of SST in September, we expect loan growth to taper but still remain slightly above 5.0% for the year. Given the expected moderating trend in loan growth as well as the slowing economic growth going forward we expect Bank Negara Malaysia (BNM) to keep the OPR at 3.25% for the rest of the year.

Source: Kenanga Research - 1 Oct 2018