August 18 loans continued its upward trend albeit at a slower pace adding another 10bps to +5.3% YoY and 30bps MoM to +0.6%. While household loans are still resilient due to the tax holiday, applications and approvals moderated in August, indicating moderation 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 maintain a Neutral outlook for the sector. Most of the stocks in our banking universe are rated MARKET PERFORM except for AMMB (TP: RM4.50), BIMB (TP: RM4.90) and MBSB (TP: RM1.40) which all of them are rated as OUTPERFORM.

August loans continued its uptrend albeit at a slower pace adding another 10bps in August to +5.4% YoY (Jul 18: +5.3% YoY) to RM1,640m. MoM loans saw a pickup in pace (30bps vs moderating by 40bps to 0.3% MoM in Jul) to 0.6% MoM. As the month August, being the last period of the 3-month tax holiday period, the uptick is not a surprise. Households, the most beneficiary of the tax holiday saw another 20bps uptick in Household loans to +6.4% YoY (Jul 18: +6.2% YoY) whilst Business loans were flat at +4.4% YoY. Uptick in outstanding loans can also be attributed to disbursements (Aug 18: +4.2% YoY vs Jul 18: +14.4%) outpacing repayments (Aug 18: +3.5% YoY vs Jul 18: +12.4% YoY). Disbursements to household maintained double-digit growth at +12.4% YoY (vs Jul 18: +22.4% YoY) as Business disbursements slowed (Aug 18: +1.4% YoY vs Jul 18: +11.7% YoY). On an annualized basis, loans grew another 40bps to 5.4% YoY (Jul 18: +5.4% YoY).

Overall net financing in the financial sector inched up by another 20bps to +6.9 YoY (Jul 18: +6.7% YoY as both corporate bonds and loans trek higher by another 60bps and 30bps, respectively, to +13.0% YoY and 4.7% YoY.

Business applications rebounded, but Households slowed. August saw higher loans applications (+5.3% YoY vs Jul 18: +1.7% YoY) as Business rebounded (+6.0% YoY) but Households moderated (+4.7% YoY vs Jul 18: +15.1% YoY). Rebound in Business applications was led by other purposes (+26.5% YoY vs Jul 18: +8.5% YoY) and purchase of non-residential property (+19.8% YoY vs Jul 18: +12.9% YoY) while the moderation in Households was underpinned by moderation in mortgages (+3.0% YoY vs Jul 18: +14.5% YoY) and hire-purchase (Jul 18: +33.1% YoY vs Aug 18: +9.1% YoY).

Approvals were in contrast with applications, falling marginally, (0.1% YoY vs Jul 18: +0.6% YoY) as Business approvals continued its downward trend falling 8.0% YoY (Jul 18: -11.6% YoY) whilst households slowed to +8.1% YoY (vs Aug 18: +14.1% YoY). Business applications were dragged by fall in application for other purposes (-50.6% YoY vs Jul 18: -16.2% YoY) while the moderation in Households was attributed to fall in purchase of residential property (-0.8% YoY vs Aug 18: 1.8% YoY) and moderation in the hire-purchase ( +33.7% YoY vs Aug 18: 57.4% YoY).

Deposits and CASA fell but liquidity still ample on account of moderate demand. August deposits slowed by 30bps to +5.5% YoY (Jul 18: +5.8% YoY) to RM1,817m with CASA and Fixed Deposits slowing by 40bps and 20bps, respectively (+3.4% YoY and +3.7% YoY vs Jul 18: +3.8% and 3.9% YoY respectively). CASA ratio/total deposits fell by another 20bps to 26.5%. Both loan-todeposit ratio (LDR) and loan-to-fund (LTF) ratio remained steady and ample; inching by 9bps and 31bps, respectively, to 90.3% and 83.7% but excess liquidity fell by 10bps to 9.7%. For the month of August, average lending rate fell by 9bps to 4.98% but 3-month deposit rate remained flat at 3.16%.

Asset quality still holds. Net impaired loans continued to improve falling by 23bps to 0.99% (Jul 18: 0.98%) with GIL easing by 9bps to 1.58% (Jul 18: 1.58%). GIL for households eased by 5bps YoY but was flat for MoM for August18 at 1.12% but for Business, there was a 1bps uptick MoM to 2.05% despite easing 10bps YoY.

The northward trend in loans was not unexpected as zero tax holiday continued to support the resilient households. While business applications rebounded, we view applications will still be moderate towards the end of the year, with moderation in Business 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 issues of concern, with downside pressure on lending evident, 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 of them are labelled as MARKET PERFORM (with the exception of AMMB (TP: RM4.50), BIMB (TP: RM4.90) and MBSB (TP: RM1.40) which are rated as OUTPERFORM due to attractive value propositions after sharp depreciation in prices). 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.

Source: Kenanga Research - 1 Oct 2018