Loans growth in May saw a 10bps improvement to +4.6% YoY. Coming from the recent rate cut, Loan Application continues on the uptrend with approval moving in tandem. Business disbursements continue to be on double digits for the 2nd consecutive month. Pending our strategy report this week our Neutral call for the sector maintained but valuations are attractive. In fact, most banks under our coverage are 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).

Slight uptick. May 19 loans saw upticks in both YoY and MoM basis. Loans saw a 10bps uptick to +4.6% YoY (vs Apr 19: +4.5% YoY) to RM1,688b (vs. Apr 19: RM1,682b). From being flat the previous month, loans saw +0.3% MoM growth. While Household loans saw a 40bps uptick to +5.6%, Business continued to be a dampener, moderating by 20bps to +3.6% YoY for May 19. On an annualised basis, loans climb by another 50bps to end +2.1% for May 19.

Business moderating, Household resilient but Business Disbursements continued to be on double digits. Household continued to be resilient at +5.6% YoY supported by Mortgages; up by 20bps to +7.2% YoY, credit card uses (+160bps to +3.8% YoY) with PF still resilient at +5.8% YoY (vs. Apr 19: +5.8% YoY). Moderation in Business were underpinned by moderation in purchase of fixed assets (11% YoY vs. Apr 19: +13% YoY), Other Purposes (+10% YoY vs. Apr 19: +5% YoY) while working capital saw a 20bps uptick to +3% YoY.

May 19 also saw repayments (+17% vs. Apr 19: 14%) continued to outpaced disbursements (+13% vs Apr 19: 10%), with Business (+19% vs. Apr 19: +16%) repayments outpaced disbursements, but Households segment bucks the trend; disbursements (+16% vs. Apr 19: +8%) outpacing repayments (which was at +10%). However, Business disbursement continued to be on double digit for the 2nd consecutive month.

Overall net financing in the system reversed its downward adding 110bpsto +5.9% YoY with loans adding 10bps to +4.9% YoY but corporate bonds higher at (530bps) to +11.1% YoY.

Applications continued to be positive. Loan applications continued to improve (+15% YoY vs. Apr 19: +6.0% YoY) to RM78,841m. Both Business and Household applications continued to be an uptrend rebounded (+12% YoY and +17% YoY vs. Apr 19: +10% YoY and +1% YoY, respectively). Catalysts for the Business’ were surged in purchase from non-residential property (+13% YoY vs. Apr 19: flat) to RM8,450m. Surge in Households was led by residential mortgages (+37% vs. Apr 19: +12%) to RM25,602m.

Approvals followed suit, led by Business. Approvals continued to be in the uptrend, surging another 540bps to +10% YoY, as both Business and Households continues to gain pace; Business at +4% YoY (vs. Apr 19: +2% YoY) to RM17,604m and Households at +18% YoY (vs. Apr 19: +8% YoY) to 17,121m. Households’ elevated approvals were led by residential property (+13% YoY vs. Mar 19: +2% YoY) and HP (+7% vs. +10%). Households' loan approvals were led by mortgages (24% YoY vs. Apr 19: +13% YoY) while Business segment loan approvals were underpinned by purchase of securities (+81% YoY) to RM3,491m.

With applications outpacing approvals, Approval rate in the system saw 180bps uptick to 44%, led by Business approvals up by 650bps to 47% while Households were still tight at; -280bps to 41% indicating the banks are still selective on assets coming from the Households space.

Excess liquidity remained strong as deposits outpaced loans. Deposits outpaced loans in the same pace in Apr by 150bps (+6.1% YoY vs. Apr 19: +6% YoY) thereby excess liquidity remained flat +11.5% (or 19% YoY). The uptick in deposits was driven by deposits from Federal government. (64% YoY to RM31,899m) and from individuals (+11% to RM728,065m) while Business Enterprises saw a 50bps (-0.5% YoY) to RM634,531m. Loan-to-fund (LTF) ratio and loan-to-deposit ratio (LDR) were relatively stable at 82% and 88%, respectively. The fall in low cost deposits from Business enterprises coupled with CASA ratio still below the 27% mark will put additional pressure on NIM as funding costs intensifies.

Average lending rate dipped by 11bps to 4.93% while 3-month deposits fell 24bps to 2.93% due to the recent OPR cut. While deposits rate outpace lending rates, reprieve on NIM pressure will be short-live.

Business asset quality stable. GIL continues to be stable at 1.5% with asset quality improving as impaired loans fell 1% YoY. Business GIL remained stable at 1.97% but Households saw 1bps uptick to 1.07% led by 5bps uptick in PF to 1.86%.

Uncertainties from the external fronts are still prevailing, but domestic risks are looking stable despite challenging external conditions. Pending our strategy report coming this week, we maintained our Neutral view; moderate loans growth still holds with the soft capital markets. However, valuations seem more attractive with most of the banking stocks under our coverage are rated as 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).

Source: Kenanga Research - 1 Jul 2019