System loan growth in July eased to 8.6% y-o-y from 9.3% y-o-y in June due to a surge in business loan repayments.  Meanwhile, average BLR of  banks  rose  25bps m-o-m, fully  reflecting  July’s OPR  hike.  Average lending  rates  should  trend  up  as  repricing  takes  place  while  higher deposit  rates  may  help  improve  deposit  gathering  momentum  ahead. Competitive  pressures,  however,  should  keep  a  lid  on  margins. Maintain NEUTRAL.

System loans base at end-July stayed  flat m-o-m  (June: +0.9% m-om),  due to a surge in repayments (July: MYR87bn vs  June: MYR77bn) mainly  from  the  business  segment.  Disbursements  in  July  were  also weaker (-3%  vs June). Thus, system loan growth moderated further to 8.6% y-o-y from 9.3% y-o-y in June. Loans to businesses expanded by a slower pace of 5% y-o-y (June:  +6% y-o-y) while household loan growth eased to 11.5% y-o-y  (June:  +11.9% y-o-y).  During the recent 2QCY14 reporting quarter, loan growth for some of the larger banks was muted as the  wholesale  segment  was  impacted  by  loan  repayments.  However, these  banks  said  that  their  wholesale  pipelines  were  generally  healthy and guided for stronger drawdowns ahead. Thus, while annualised loan growth stood at 6.6%, we keep our 9-10% expectations for now. 

July  loan  leading  indicators  were  broadly  stable  m-o-m  but  y-o-y, applications  were  down  8%  while  approvals fell  9%,  mainly  due  to  the household  segment.  Loan  applications  and  approvals from households fell 22% y-o-y (-6% m-o-m) and 13% y-o-y (flat m-o-m) respectively, with the declines  stemming from auto and residential mortgages. That said, applications and approvals in July 2013 were exceptionally strong, ie the y-o-y  declines  mentioned  above  were  partly  due  to  the  base  effect. Meanwhile, business loan demand in July was up 3% m-o-m and 13% yo-y, while approvals were broadly stable m-o-m and y-o-y. 

Absolute  gross  impaired  loans  fell  0.7%  m-o-m  and  5%  y-o-y respectively. However, gross and net impaired loan ratios were relatively unchanged  from  June,  at  1.8%  and 1.3% respectively,  given  the  weak loan growth. System loan loss coverage remained healthy at 104%.

System  deposits  up  0.5%  m-o-m  (+7%  y-o-y).  With  the  hike  in  the overnight policy rate (OPR) in July, depositors will now receive a higher rate  of  return  on  their  deposits  and  this  may  help  improve  deposit gathering  activities  ahead.  The  system  loan-to-deposit  ratio  was  down 30bps m-o-m to 85.5%, as at end-July.

Average  base  lending  rate  (BLR)  rose  25bps  m-o-m  to  6.78%  as banks  adjusted  for  the  OPR  hike.  However,  the  average  lending  rate only  rose  7bps m-o-m to  4.61%,  possibly a reflection of the time lag in repricing up lending rates. 

Investment  case.  We  remain  NEUTRAL  on  the  sector  with  Maybank, AMMB and BIMB as our Top Picks (see table below).

Source: RHB