Liquidity positions still tight

Industry loan growth got off to a slow start in Jan 2016, rising just 1.8% on an annualized basis, and 7.7% YoY (vs 7.9% YoY end-Dec 2015). What stood out, however, is that deposit growth slowed even more to just 0.9% YoY, as total deposits contracted MYR12.6b MoM in Jan 2016. Liquidity positions remain tight and we do not rule out a further 50bps cut in the SRR to 3.00% at the upcoming MPC meeting on 8-9 Mar 2016. We remain NEUTRAL on the sector. BUY AFG, HL Bank and HLFG, SELL AMMB.

Loan growth continued to moderate

Industry loan growth slowed to 7.7% from 7.9% YoY end-Dec 2015. Household loan growth dipped to 7.6% YoY from 7.7% end-Dec 2015 while non-HH loan growth was a slower 7.8% YoY vs 8.0% YoY end-Dec 2015. Total deposits slowed even further in Jan 2016 to just 0.9% YoY from 1.8% YoY in Dec 2015 and contracted MYR12.6b MoM in Jan 2016. As a result, the industry’s loan/deposit ratio (LDR) rose to 89.0% end-Jan 2016 from 88.7% end-Dec 2015 while the loan/fund ratio (LFR) was higher at 83.3% end-Jan 2016 vs 83.0% end-Dec 2015.

In absolute terms, there has been a pick-up in household NPLs, mainly caused by, we believe, the reclassification of restructured & rescheduled (R&R) loans as NPLs. Nevertheless, the industry’s gross NPL ratio was stable at 1.61% versus 1.60% end-Dec 2015. The loan loss coverage ratio was lower at 95.6% end-Jan 2016, off the high of 105% end-June 2014.

Further cuts in the SRR cannot be ruled out

We maintain our industry loan growth forecast of 6.5% for 2016 (7.9% in 2015), which is premised on a decline in HH loan growth to 6.1% and non- HH loan growth to 7.0%. Liquidity positions remain tight and our Economics team does not rule out the possibility of another 50bps cut in the Statutory Reserve Requirement (SRR) to 3.00%, at the upcoming Monetary Policy Committee (MPC) meeting on 8-9 Mar 2016. To note that every 50bps cut in the SRR releases about MYR6b of liquidity into the banking system and could lower the Base Rate by 3bps.

Source: Maybank Research - 2 Mar 2016