Loans growth continued to moderate as the growth rate shed another 10bps to +4.9% YoY. Applications rebounded with approvals for Households surging ahead, but Business moderated on account of external risks concerns. Hence, 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: RM2.40), ABMB (TP: RM4.25), AMBANK (TP: RM5.10), CIMB (TP: RM6.25), MAYBANK (TP: RM10.35) and MBSB (TP: RM1.15). Others are NEUTRAL: - BIMB (TP: RM4.80), HLBANK (TP:RM20.05), PBBANK (TP: RM24.10) and RHBBANK (TP: RM6.05)

Moderation continues YoY. For April 19, loans slowed by another 4bps to +4.5% YoY (vs. Mar 19: +4.9% YoY) to RM1,682.5b (vs. Mar 19: RM1,682.2b. MoM loans were flat (Mar 19: +0.4% MoM). Business dragged loans growth, moderating 70bps to +3.8% while Households remained resilient at +5.2% YoY (vs. Mar 19: +5.3% YoY) On an annualized basis, loans moderated (50bps) to +1.6% (vs. Mar 19: +2.1% vs. Apr 18: +4.8%).

Business moderating, Households resilient. Moderation in Business was underpinned by working capital (Apr 19: +3.1% YoY vs. Mar 19: +4.6% YoY while Construction saw a 120bps uptick from the previous month (April 19: +2.3% vs. Mar 19: +1.1% YoY). The resilient Households continued to be supported by mortgages (flat at +7.0% YoY) with HP remaining flat at -0.5% YoY while PF continued its moderation sliding 60bps to +5.9% YoY (vs. Mar 19: +6.5% YoY). April 19 also saw repayments (+14.4% YoY vs. Mar 19: +5.43% YoY) outpacing disbursements (+9.8% YoY vs. March +3.8% YoY). Disbursements continued to grow as both Business and Household disbursements saw uptick of +7ppts and +2ppts in April 19 at +10.5% YoY and +7.7%, respectively, (vs. Mar 19: +3.2% YoY and +5.7% YoY respectively). Overall net financing in the system shed another 30bps to +4.8% YoY with loans shedding 40bps and corporate bonds slower at (20bps) to +6.8% YoY.

Applications rebounded. Loan applications continued to improve (+5.8% YoY vs. Mar 19: -6.0% YoY) to RM82,229m. Both Business and Household applications rebounded (+10.3% YoY and +1.1% YoY vs Mar 19: -7.7% YoY and -4.2% YoY, respectively). Catalysts for the Business’ rebound were from other purposes (+87% to RM7,636b) and construction (+45% YoY to RM4,050m) while working capital continued to decline (-7.2% YoY to RM17,517m). Rebound in Household rebound was led by residential mortgages (+12.2% to RM23,662m).

Approvals moderated, led by Business. Approvals continued to be in the positive territory despite moderating 130bps to +5.1% YoY; moderation due to moderation in Business (-8ppts to +2.5% YoY) as Households surged 640bps to +7.9% YoY. Moderation in Business was seen dragged by working capital (-16% YoY vs. +14% YoY) with construction continued to fall (- 39% YoY vs. -10% YoY). Households’ elevated approvals were led by residential property (+13% YoY vs. Mar 19: +2% YoY) and HP (+7% vs. +10%).

Excess liquidity remained strong as deposits outpaced loans. Deposits outpaced loans in April by 150bps (+6.0% YoY vs. Mar 19: +5.8% YoY or +90bps) thereby pushing excess liquidity by 40bps to +11.7% (or 18.4% YoY). The uptick in deposits was driven by deposits from Federal government. (40% to RM30,0451m) and from individuals (+5.7% to RM724,709m). Loan-to-fund (LTF) ratio and loan-to-deposit ratio (LDR) were relatively stable at 82% and 88%, respectively. Average lending rate dipped 1bps to 5.02% in April while 3-month deposits inched 1bps to 3.16% as competition for assets and deposits continued, adding additional pressure on NIM.

Deterioration MoM led by Business. YoY saw April GIL fell 7bps to 1.51%; however, on MoM basis, it saw an uptick by 5bps. YoY Business GIL fell 8bps to 1.97% whilst Households fell 5bps to 1.06%. Business saw uptick of 13bps led by working capital (+26bps to 2.06%) and Real Estate (+5bps to 1.44%). Households saw improvement in quality falling 2bps to 1.08%, led by PF (falling 17bps to 1.81%).

Volatile sentiments undermining credit demand. Business sentiments continued to be volatile on account of the soft applications and weak approvals. On the household front, sentiments seemed to be mix as applications for HP, PF and credit card are weak but mortgages continue to be chugging along. While YoY applications and approvals for PF and credit card seemed to be on a downtrend, MoM applications and approvals seemed to be heading north, after their lows in Feb 19. YoY applications and approvals seemed to be resilient chugging along fine, even MoM, lending support to our view that 2019 loans will be supported by resilient household on account of accommodative interest rates (supported by the recent OPR cut) and stable asset quality. Improving asset quality leading to higher approvals will lend support for household demand. External risks seemed to be volatile lately, putting 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 - 3 Jun 2019