Loans continued to moderate as loans growth shed another 10bps to +4.9% YoY. However, tepid loans applications seem to be bottoming ahead with approvals rebounding, indicating an upturn ahead in credit demand. Despite the positive news-flow recently, we maintain our Neutral call for the sector as external uncertainties prevail; still, valuations are attractive with most banks under our coverage rated at OUTPERFORM; AFFIN (TP:RM2.60), ABMB (TP: RM4.45), AMBANK (TP:RM4.95), BIMB (TP: RM5.05), CIMB (TP:RM6.10), MAYBANK (TP: RM10.20) and MBSB (TP: RM1.15).

Moderation continues. For March 19, loans slowed by another 10bps to +4.9% YoY (vs Feb 19: +5.0% YoY) to RM1,682b. MoM loans rebounded slightly to +0.4% (Feb 19: -0.2% YoY). While Business moderated by 10bps to +4.5%, Households was flat at +5.3%. On a QoQ basis, loans continued to moderate at +0.5% QoQ (vs 4QCY18: +1.5% QoQ). On an annualized basis, loans saw uptick in March at +2.1% (vs Feb 19: +0.9% vs March 18:+ 4.8%).

Corporate bonds moderated in tandem with Business loans. Moderation in Business was underpinned by working capital (March 19: +4.6% YoY vs Feb 19: +5.2% YoY and Construction (March 19: +1.1% vs Feb 19: +2.8% YoY while the flat Households was underpinned by resilient mortgages (flat at +7.1% YoY). However, HP

continued to be in negative territory (-0.5% YoY vs Feb 19: -0.6% YoY) while Personal Financing moderated, falling below the +7% mark since Jul 18 at +6.5% YoY (vs Feb 19: +7.2% YoY). March 19 also saw repayments (+5.8% YoY vs Feb 19: +3.8% YoY) outpacing disbursements (+3.8% YoY vs (-2.3% YoY). Both Business and Household disbursements saw rebound in March 19 at +3.2% YoY and +5.7%, respectively, (vs Feb 19: -1.5% YoY and -4.4% YoY respectively). Overall net financing in the system shed another 30bps to +5.1% YoY with loans flat at +4.5% but corporate bonds shed 70bps to +7.1% YoY (vs Feb 19: +7.9% YoY).

Negative sentiments receding. Weakening applications since early this year seemed receding as applications fell 6% YoY (vs Feb 19: -14% YoY vs Jan 19:-5% YoY) to RM72,080b. Business and Household applications fell 7.7% and 4.2% YoY respectively (vs Feb 19: -20.1% YoY and -7.4% YoY respectively). For Business, receding fall in applications can be seen in: (i)

Working Capital (-1.1% YoY vs Feb 19: -15.2% YoY, (ii) non-residential (-6% YoY vs Feb 19: -16.5% YoY), and (iii) construction

(-18.8% YoY vs Feb 19: -57.3% YoY). For Households, rebound in mortgages (+5.5% YoY vs Feb19: -0.7% YoY) mitigated the weakening applications.

Approvals rebounded. Approvals in Mar 19 rebounded to +6.4% YoY with Business and Households rebounding at +10.6% YoY and +1.5% YoY respectively. For Business approvals strong rebound can be seen in purchase of transport vehicles

(+85.5% YoY vs Feb 19: -16.3% YoY) with purchase of non-residential rising sharply at +65.2% YoY vs Feb 19: +0.7% YoY). For Households, rebound in approvals for mortgages and HP (+1.9% YoY and +10.4% YoY vs Feb 19: -9.0% YoY and -9.7% YoY) supporting Households approvals.

Moderating theme, improving liquidity. Liquidity in the system continued to improve as excess liquidity improved by 30bps to 11.3% to RM213b. As loans moderated, deposits followed the moderating theme, slowing by 11bps to +5.8% YoY (Feb 19: +6.9% YoY) with moderation coming from fall in State Government deposits’ at 8% YoY to RM30,766b (vs Feb 19: -4.6% YoY). Loan-to-fund (LTF) ratio and loan-to-deposit ratio (LDR) were relatively stable at 82% and 89%, respectively. Average lending rate saw a 1bps uptick for Mar 19 to 5.03%, with 3-month deposit shed 1bps to 3.15% putting downside pressure on NIM.

Asset quality improving. March 19 saw a 2bps improvement as Gross Impaired Loans (GIL) fell to 1.46%. Both Business and Household improved (shedding by 2 and 3bps, respectively) at 1.84% and 1.08%, respectively. Overall both Net Impaired and Gross Impaired loans fell 2.7% YoY and 2.6% YoY, respectively.

Resilient Household supported by improving asset quality. We still believe that 2019 loans will be supported by a resilient household on account of accommodative interest rates and stable asset quality. Improving asset quality leading to higher approvals will lend support for household demand. Despite the positive domestic news-flow lately, further external risks might put a dampener on business sentiments with softer demand and applications with higher risk perceived lowering approval rates. While we view that banks will still maintain selective asset quality, the stable system asset will see continued demand from the resilient households especially demand for residential property and personal financing (from quality borrowers).

Source: Kenanga Research - 2 May 2019