Bank Negara (BNM) has released banking system data for the month of October, with loan growth rising a 7th straight month to 6.0% year-on-year, the strongest since 1Q17. Macquarie Equities Research (MQ Research) summarized the highlights in a report dated 5 December 2018, and is overweight on banks from robust 3Q18 reporting.

Event

• Oct system loans growth rose a seventh straight month, to 6.0% year-on-year (YoY) (Sept: 5.7%), strongest since 1Q17. MQ Research notes month-on-month (MoM) upticks for both applications (+7%) and approvals (+4%), the latter at its strongest since 2015. Corporate lending surpassed that of households for the first time since Oct 17, the latter weighed down by mortgages growth now at 7.9% YoY (Sept: 8.0%), slowest since 1H08. Average lending rate (ALR) recovered even as reported deposit rates remained flat – coupled with bank guidance deposit competition appears to have peaked, weak 2Q/3Q sector net interest margin (NIM) may be able to stabilise. The data supports MQ Research’s broad view that discounted corporate-centric banks with regional platforms (i.e. Maybank, CIMB, RHB) will remain relative outperformers re loan growth and opex, credit cost improvements, while defensive retail banks dependent on property lending (Public, HLBK) will lag.

Impact

• Business lending continued to recover, to 6.1% YoY (Sept: 5.4%), with momentum remaining broad, led by working capital (+5.5%) – in contrast, household lending slipped below 6% as mortgage and auto remained sluggish even as unsecured consumer was flat MoM. System deposits growth accelerated, to 7.0% YoY (Sept: 6.4%), strongest since 1H15. Robust system liquidity is underscored by lower loan deposit ratio (LDR), record system liquidity coverage ratio (LCR) (147%) and substantial surplus liquidity parked with BNM (>RM170bn), with fixed deposit (FD) board (but not tactical) rates flat post-adjustment for Jan 18 overnight policy rate (OPR) hike.
• ALR recovered in Oct and on a year-to-date (YTD) (ALR +37bps YTD vs. FD rates +23bps) basis, is outpacing deposit board rates. After weak 2Q/3Q NIM on tactical deposit price competition aimed at capturing retail deposit share, robust liquidity indicators and deferred NSFR (to 2020) should support NIM stabilisation despite current account and savings account (CASA) share now at its lowest since 3Q16 (25.8%).
• Gross non-performing loans (NPLs) fell 0.4% MoM, to RM25.1bn, with NPL ratio moderated to a record low of 1.52%. System coverage rose (96.4%) and common equity tier 1 (CET 1) ratio (a near-record 13.1%) is robust vis-à-vis weak asset growth and strong asset quality, i.e., supporting our view (per higher YTD cash payouts) that banks are transitioning from capital accumulation, to ROE optimisation.

Outlook

• MQ Research is overweight on banks – loan growth e-property and non-interest income are showing recovery traction, cost of funds (COF) led NIM softness is peaking, while opex and credit costs remain capped. Top picks Maybank and RHB, per YTD 3Q results, are delivering on cost control and higher cash dividends; switch out of Public Bank given structurally crimped growth prospects (property lending is >60% of loan book) vs. Asia-topping valuations.

Source: Macquarie Research - 6 Dec 2018