● M3 growth softened in May (3.8; Apr: 4.3%), its lowest level in 14 months

• MoM: returned to expansion (0.2%; Apr: -0.5%).
   
• Moderation was attributable to softer M1 growth (15.1%; Apr: 18.3%), as demand deposits slowed (15.1%; Apr: 18.2%),mainly due to the slowdown in the financial market.

● Driven by softergrowth inpublic spendingand private sector spending, which outweighed a rise in net external reserves

• Net claims on government (0.7%; Apr: 3.8%): moderated to a nearly 3-year low, partly due to a higher base effect, and a rise in government deposits (32.3%; Apr: 22.1%).
   
• Claims on the private sector (3.5%; Apr: 3.6%): edged lower on a decrease in holdings of securities (2.0%;Apr: 2.8%) by the banking system.
   
• Net external reserves (2.0%; Apr: 1.8%): edged higher, largely due to a smaller decrease of foreign reserves in the banking system (- 4.3%; Apr: -6.6%).

● Loan growth remained at a 7-month high (3.9%; Apr: 3.9%)

• By purpose: driven by a sustained 7-straight months of positive YoY growth in residential property loans (7.4%; Apr: 7.4%) and a 11-successive months of positive growth in passenger car loans (7.7%; Apr: 7.3%).
   
• By sector: a 4-month high for manufacturing loans (0.5%; Apr: 0.0%) as well as a smaller decrease in loans for other sectors (-28.6%; Apr: -38.0%), in spite of a further slowdown in loans for the real estate sector (-1.9%; Apr: -0.8%) and plummeting loans for the mining & quarrying sector (-7.1%; Apr: 8.7%).
   
• MoM: edged higher by 0.3% (Apr: 0.0%), amid a slightly lower weighted average lending rate of commercial banks (3.42%; Apr: 3.45%).

● Deposit growth increased to 5.0% YoY (Apr: 4.6%), rising by 0.3% MoM (Apr: -0.8%)

• A further rise in repurchase agreements (51.7%; Apr: 5.4%), a 29-month high, and other deposits accepted (4.0%; Apr: 1.4%), outweighed a slowdown in demand deposits (16.4%; Apr: 19.3%).

● 2021 loan growth forecast range retained at 3.5% - 4.5% (2020: 3.4%), despite extended lockdown

• We still expect loan growth to be moderately supported in 2H21, despite persistently high local COVID-19 cases and the extension of lockdown measures, as pent-up demand will likely release as lockdown restrictions are eased in Phase 2 and Phase 3 of the National Recovery Plan. The release of additional fiscal stimulus, under the new RM150.0b PEMULIH package and on top of the recent PEMERKASA+ package, should help minimise the impact of current lockdown measures.
   
• We still expect Bank Negara Malaysia to keep the policy rate at 1.75% for the rest of the year, under the expectation that economic growth will improve as the economy gradually reopens in line with the National Recovery Plan.

Source: Kenanga Research - 1 Jul 2021