December 2018 saw the loans upward traction being terminated as loans growth moderated, shedding another 60bps to +5.6% YoY. Both Business and Households saw moderation in trend. Indications are mixed ahead as applications rebounded to +4.8% YoY but approvals fell 8.5% YoY. Uncertainties and volatility still prevail for the sector; thus, our NEUTRAL stance is kept unchanged. However, we have OUTPERFORM call for some of the smaller-sized banks under our coverage, i.e. AFFIN (TP: RM2.60), BIMB (TP: RM5.05), CIMB (TP: RM6.05) and MBSB (TP: RM1.25). The others are rated as MARKET PERFORM.

Slight uptick in Dec18 but overall loans moderated. Loans growth for 2018 ended at +5.6% YoY to RM1,665b (vs.. 2017: +4.1%) at the upper end of our estimate of 5-5.4% YoY due to strong performances in Dec18, growing +0.6% MoM (vs. Nov 18: +0.4%). On a QoQ basis, loans moderated at +1.4% vs. 3Q18: +1.5%. Overall loans momentum moderated by 60bps (Nov 18: +6.2% YoY). Both Business and Households loans moderated, with Business shedding 100bps to +5.5% YoY (vs. Nov 18: +6.5% YoY) whilst Households shed 10bps to +5.8% YoY (vs. Nov 18: +5.9% YoY). The sharp slowdown in momentum for Business was exacerbated by a sharp slowdown in working capital

(-80bps to +6.4% YoY vs.. Nov18: +6.2% YoY) with demand for loans for other purposes shed 670 bps to +12.9% YoY (vs. Nov18: +19.6% YoY). The moderation in Households was supported by a slight moderation in demand for residential property at +7.6% YoY (vs. Nov 18: +7.8% YoY) with personal financing stable at +7.8% YoY). Dec18 also saw higher loans repayments +22.4% YoY vs. disbursements of +13.2% YoY (Nov 18: +5.0% vs. +6.3%) which contributed to the moderate loans in Dec18. Business loans continued to be the frontrunner for disbursements at +13.9% YoY (vs. Nov18: +9.3% YoY) as Households rebounded to +11.0% YoY (vs. Nov18: -1.8% YoY). Overall net financing in the system shed 100bps to +5.8% as demand for both loans and corporate bonds slid, with loans shedding 50bps to +5.1% YoY (vs. Nov18: +5.1% YoY) while corporate bonds shed 250bps to+8.0% YoY (Nov18: +8.0% YoY).

Sentiments from Business still upbeat. Despite the moderation in outstanding loans, sentiments seemed to be positive ahead as Dec loan applications rebounded +4.8% YoY to RM59.8b (vs. Nov 18: -24.3% YoY). Dec loan applications were driven by Business (+13.2% YoY to RM29.5b vs. Nov 18: -32.0% YoY) as Households continued to be in the negative territory albeit at a slower pace (-2.2% YoY vs. Nov 18: -15.4% YoY). The positive uptick for Business was seen in applications for purchase of securities (+119.8% YoY) to RM4.3b and applications for other purposes (+44.2% YoY to RM3.8b). Applications for working capital continued to slide, by 1.7% YoY to RM12.5b (vs. Nov 18: -35.1% YoY). Weak consumer sentiment still prevails with broad-based fall in applications with the exception for applications for residential property, which rebounded 6% YoY to RM16.8b (vs. Nov 18: -10.8% YoY).

…but approvals were downbeat led by Business. However, as sentiments improved, approvals slid further, falling 8.5% YoY (vs. Nov 18: -6.7% YoY) to RM30.9b. Both Business and Households saw a fall in approvals with Business falling at a higher pace (-13.0% YoY vs. Nov 18: -3.1% YoY) while Households seemed to moderate (-2.1% YoY vs. -11.0% YoY). Falling approvals in working capital and other purposes dragged Business approvals (-8.7% YoY and -69.6% YoY,) to RM9.2b and RM1.4b, respectively. For Households, fall in approvals was mitigated by uptick in purchase of residential property, which rebounded (+4.0% YoY vs. Nov -5.2% YoY) to RM7.6b while personal use rebounded 11.5% YoY (vs. Nov 18: -1.6% YoY) to RM1.7b. However, with the fall in approvals outpacing decline in applications, approval rate in the system slid 3ppt to 51.6% dragged by Business (59.1% vs. Nov 18: 64.1%) with households at 44.4% (vs. Nov 18: 45.9%).

As loans moderated, liquidity is fairly stable. Liquidity continued to flourish for Dec 18, as deposits continued its traction adding another 60bps to +7.8% YoY to RM1,883b. Deposits gained, supported by growth in foreign-currency deposits at +23.4% YoY vs. Nov 18: 18.8% YoY to RM142.4b and Tawarruq fixed deposits at +17.4% YoY to RM343.9b (Nov 18: +12.9% YoY). CASA moderated, sliding 200bps to +1.2% YoY but the ratio improved by 30bps to 26.5%. Loan-to-fund (LTF) ratio and loan-to-deposit ratio (LDR) were relatively stable at 83% and 89%, respectively, with excess liquidity fairly stable at 11%. Average lending rate was flat for Dec 18, up by 4bps to 5.02% while the 3-month deposit remained flat at to 3.15% alleviating downside pressure on NIM.

Asset quality continued to improve, led by Business, as Net impaired loans continued to improve, falling by 21bps to 0.91% (Nov 18: 0.93%). GIL eased by 8bps YoY to 1.45% (Nov 18: 1.49%). GIL for Households eased 1bps YoY and MoM to 1.09% with Business GIL eased 20bps YoY and 6bps MoM to 1.81%.

Loans in 2019 look to be challenging ahead with the prevailing uncertainties. Loans should be supported by resilient households on account of accommodative interest rates and stable asset quality. We expect 2019 loans growth to be <5%. Household demand will be supported by stable employment and wages with inflation looking subdued. The consistently improving asset quality will, in our opinion, sees banks having a healthier appetite for household loans and we would not be surprised if competitive lending rates resurface (in order to prop up demand) putting downside pressure on NIM.

With uncertainties on both domestic and external fronts prevailing, potential total return in our banking universe is <5%; with no visible catalyst and potential game changer ahead. Thus, we maintain our NEUTRAL stance. However, we have a few OUTPERFORMers in some of the smaller-sized banks in our coverage, i.e. AFFIN (TP: RM2.60), BIMB (TP: RM5.05), CIMB (TP: RM6.05) and MBSB (TP: RM1.25). The other banks are rated as MARKET PERFORM. Both ABMB and RHBBANK are downgraded to MARKET PERFORM due to their less attractive valuations.

Source: Kenanga Research - 4 Feb 2019