Loan growth in August was flat at +3.9% YoY; MoM saw a 60bps uptick to +0.6%. While Households were marginally flattish, Business saw another 20bps uptick to +3% YoY. We maintain our view of a pick-up in loans post-budget 2020; at current MoM pace, we anticipate loans growth for 2019 at +5.5% YoY, slightly higher than our previous estimation of ~5%. Our call on the sector remains OVERWEIGHT as valuations are attractive. In fact, most banks under our coverage are rated OUTPERFORM: - AFFIN (TP: RM2.45), ABMB (TP: RM3.45), AMBANK (TP: RM4.75), BIMB (TP: RM4.80), CIMB (TP: RM6.45), MAYBANK (TP: RM9.70), MBSB (TP: RM1.10), PBBANK (TP: RM24.10) and RHBBANK (TP: RM6.05). Only HLBANK (TP: RM17.30) is a MARKET PERFORM.

Flattish, Aug 19 loans were flattish at +3.9% to RM1,755b. On a MoM basis, loans were up by 60bps to +0.6%. While Household loans saw slight downtrend (-20bps to +4.7% YoY, Business picked up by 20bps to +3.1% YoY. The flattish loans can also be attributed to higher pace of disbursements in the system at +1.0% YoY (Jul 19: +1.8%) vs repayment at +0.9% YoY (Jul 19: +4.5% YoY). While business disbursements saw moderation by 110bps to +1.1% YoY, Households continued to be resilient adding another 10bps to +1.0% YoY. On an annualized basis, there was 60bps loans uptick to +2.9% Up-tick in Business loans growth was driven by demand for working capital (+2.1% YoY vs Jul 19: +1.6% YoY) with Households driven by purchase of residential property at +7.2% YoY (vs Jul 19: +7.1% YoY). Purchase of passenger cars continued to be on a downward trend for the 3rd straight month falling 80bps to -1.6% YoY. Overall net financing in the system continued to moderate by another 40bps to +4.9% YoY with loans flat at +3.6% YoY but corporate bonds shed 140bps to +8.9% YoY.

Application and approvals weak led by Households. Loan applications in the system were marginally weak, falling 20bps to -0.3% for August dragged by falling applications from Households (-9.7% YoY vs Jul 19: -7.5% YoY) with Business moderating by 110bps to +9.9% YoY. For Business, moderating applications were dragged by purchase of fixed assets (- 61.9%) and other purposes (-42.5%). On the flip side, construction saw positive momentum at +32% YoY. Weakness in Households was exacerbated by fall in purchase of passenger cars (-24% YoY vs Jul 19: +32% YoY) with residential property experiencing a dip (-3.8% YoY) since Dec 18.

Approvals for Aug 19 was still in positive territory but moderated by 9.5ppt to +1.7% YoY as Household approvals fell 3.3% YoY with Business moderating 12.5ppt to +7.3% YoY. The moderation in Business was dragged by fall in approvals for working capital (-3% YoY vs Jul 19: +32% YoY) and falling approvals in purchase of non-residential property (-21% YoY vs Jul 19: -18% YoY). Household approvals were primarily dragged by falling approvals for passenger cars (-29% YoY vs Jul 19: -31% YoY). Approval rate in the system for Aug 19 fell 4.5ppt to 43.5% dragged by moderation in Business approvals (41% vs Jul 19: 50%) while Households showed consistency at 46%.

Excess liquidity remained stable as credit demand moderates. The sombre credit demand saw deposits moderating by 30bps to +4.6% YoY to RM1,972b- but still outpacing loans by 70bps – hence, excess continued to be stable at ~11%. FD growth moderated faster vs CASA (+1.1% YoY vs +5.2 against Jul 19: +1.2% vs +5.3% YoY) indicating that intense deposit competition is tapering – due to: i) credit demand moderating, and ii) NSFR being complied. Loan-to-deposit (LDR) ratio was relatively stable at 89%. Average lending rate was flattish at 4.82% while 3-month deposits saw 2bps uptick to 2.92%.

No major changes in Impaired loans and still looking stable. GIL saw a 1bps uptick MoM in Aug 19 to 1.61% but 1bps lower YoY. NIL (Net Impaired Loans) saw similar trend – 1bps uptick MOM to 1.04% (Aug 18: 1.0%). Business’ GIL saw a 1bps uptick in Aug 19 while Households remained flat at 0.57%. Uptick for Business came from deterioration in working capital while the rest remained stable.

Continued dampener in credit demand is a surprise, 2 months into the post-festive season given the current accommodative interest rates which has raised the prospect of another rate cut in later this year. We, however, maintained that pick-up in loans will materialise post-budget, with the resilient households remaining as the driver with the low interest rate environment boosted by stable asset quality from Household and stable employment, which will spur further approvals from the banks. Households’ GIL are stable raising the prospect of banks raising their appetite for further loans from Households. At current pace, MoM, we expect loans growth in the system at at 5%- 5.5% (vs 2018: +7.1%). Valuations of our banking universe are attractive and undemanding with the exception of HLBANK which is rated OUTPERFORM: - AFFIN (TP: RM2.45), ABMB (TP: RM3.45), AMBANK (TP: RM4.75), BIMB (TP: RM4.80), CIMB (TP: RM6.45), MAYBANK (TP: RM9.70), MBSB (TP: RM1.10), PBBANK (TP: RM24.10) and RHBBANK (TP: RM6.05). HLBANK (TP: RM17.30) is rated as a MARKET PERFORM, as we put a higher discount on concerns over its Chinese associate.

Source: Kenanga Research - 2 Oct 2019