● M3 growth eased slightly to 4.3% YoY in February (Jan: 4.4%) on a high base effect

- MoM: however, it expanded to a 6-month high of 0.7% (Jan: 0.4%).

- Growth was contributed by higher fixed deposits (6.0%; Jan: 5.5%) and double-digit growth of foreign currency deposits (23.2%; Jan: 24.0%), but partially capped by a decline in other deposits (-3.7%; Jan: -0.3%)

● The M3 growth moderation was also attributed to slower expansion in net claims on government and weak net external reserves

- Net claims on government (17.9%; Jan: 19.9%): growth moderated as expansion in claims on government (16.6%; Jan: 15.5%) outpaced growth in government deposits (12.5%; Jan: -0.2%).

- Net external reserves (-0.3%; Jan: 1.8%): fell slightly due to slower expansion in foreign currency reserves held by BNM (4.2%; Jan: 4.8%) and a continued decline in foreign currency reserves held by the banking system (-17.1%; Jan: -11.3%).

● Loan growth expanded slightly to a two-month high in February (5.2% YoY; Jan: 5.0%)

- By purpose: attributable to a higher purchase of residential property (6.9%; Jan: 6.8%) and working capital (4.5%; Jan: 3.9%) which both contributed 59.2% share (Jan: 59.0%) of the overall loan. However, the growth momentum was partially capped by the weak purchase of securities (-1.3%; Jan: 0.4%).

- By sector: primarily contributed by higher growth of the household sector (5.7%; Jan: 5.6%). However, its share of the overall loan edged down slightly to 59.2% (Jan: 59.3%).

- MoM: rebounded (0.4%; Jan: -0.1%), following a marginal contraction in the previous month.

● Deposit in the banking system expanded to a four-month high in February (7.5% YoY; Jan: 7.0%), with MoM growth, jumped to a 16-month high (1.7%; Jan: 0.3%)

- The deposit growth was contributed by an increase in fixed deposits (7.2%; Jan: 6.1%) as well as a sharp expansion in negotiable instruments of deposit (78.2%; Jan: 40.3%).

● 2023 loan growth forecast maintained, to slow between 4.5% - 5.0% (2022: 5.7%)

- We maintain our outlook that loan growth will moderate further by the end of the year due to the slowing GDP growth trajectory amid the impact of tighter financial conditions from the cumulative rate tightening by BNM. This also considers the waning lower base effect and the normalisation of economic activities post-pandemic. However, loan growth will be supported by the household sector on the back of improved income and steady labour market conditions as reflected in the lower unemployment rate and various policy support to boost employment.

- Likewise, we maintain our monetary policy outlook that BNM will maintain OPR at 2.75% for the rest of the year, barring an exceptional external shock or any risk to domestic inflation and GDP growth outlook. Nevertheless, there is room for further monetary policy adjustment by +25 bps if inflationary pressure remains elevated.

Source: Kenanga Research - 3 Apr 2023