OVERVIEW

● October broad money (M3) growth expanded by 8.0% YoY (Sep: 7.2%), the highest since July 2013. This was driven by continued higher claims on the private sector (same as September’s +6.8%) and net claims on government (24.5%; Sep: 24.2%). In terms of percentage point (ppt) contribution to growth, claims on the private sector tops at 6.8 ppts, followed by net claims on government at 2.0 ppts. Declines in net other influences (- 0.6 ppt) and net external reserves (-0.2 ppt) on continued capital outflows were the main drags of M3 growth. On a MoM basis, M3 growth eased to 1.4% (Sep: 1.7%).

● Meanwhile, narrow money (M1) registered a 24-month low growth of 3.2% YoY (Sep: 4.1%) as both demand deposit and currency in circulation softened to 3.2% and 3.1%, respectively, owing to the decline in capital market performance and weaker business sentiments during the month. Of significance, M1’s YoY growth trended downward since the beginning of the year, reflecting tepid private spending relative to the preceding year. On a MoM basis, M1 growth eased to 0.3% (Sep: 0.8%).

● Loan growth retained an uptrend in October, registering at 6.0% YoY (Sep: 5.7%), an 18-month high following higher loans extended for the purchase of fixed assets excluding land and building (4.3%; Sep: 0.6%), working capital (5.5%; 4.6%) and personal use (8.2%; Sep: 8.0%), marginally offset a slight moderation in loans for the purchase of residential property (7.9%; Sep: 8.0%) and construction purposes (9.0%; Sep: 11.1%). On a sectoral basis, improvement in loan growth was most apparent in manufacturing (7.7%; Sep: 6.0%), and construction (14.6%; Sep: 14.0%). Of note, the household sector, which held the largest total contribution to growth of 3.4 ppts, recorded a slower growth, albeit marginally (5.9%; Sep: 6.0%). On a MoM basis, loan growth edged lower to 0.3% (Sep: 0.6%), in part due to the higher weighted average lending rate among commercial banks at 4.98% (Sep: 4.93%). Meanwhile, deposit growth rose to a 40-month high of 6.8% YoY (Sep: 6.3%), mainly due to a surge in foreign currency deposits (15.5%; Sep: 10.5%) which far outweighed a sharp contraction in negotiable instrument of deposits (-20.7%; Sep: -9.6%).

● Nevertheless, banks’ liquidity remained healthy as the liquidity coverage ratio improved to 147.0% (Sep: 139.5%). This was due to lower net cash outflow and higher stock of high quality liquid assets recorded in the banking system. Overall, loan growth has moderated to 5.0% YTD (2017: 5.5%), while deposit growth expanded by 5.3% (2017: 3.7%). Loan is expected to grow around 5.0% this year given the subdued inflationary trend coupled with the expectation of moderating global trade and growth. In ensuring capital market stability, ample liquidity and to remain supportive of growth, we believe BNM will hold the OPR steady at 3.25% till year end and probably next year.

Source: Kenanga Research - 3 Dec 2018