System loan growth in October was stable at 9% YoY with a pickup in business loans growth offset by a moderation in household lending. Stay NEUTRAL. We note an improvement in asset quality (down 1% MoM) while loan loss coverage rose to 104% from 102% in the previous month, but the average lending rate and leading indicators softened MoM. 
 
YoY system loan growth stable… MoM loan growth eased to 0.9% compared with +1.3% MoM in September due to a jump in business loan repayments (October: MYR67bn vs September: MYR62bn). That said, YoY loan growth was stable at 9% (September: +9% YoY). Business loan growth enjoyed an uptick to +6.7% YoY vs September’s +6.2% YoY, and off the YTD low of +5% YoY in July. Meanwhile, YoY household loan growth eased to +10.8% from +11.1% YoY in September, dragged down by auto lending (+1.5% YoY), with the auto 
loan base staying flat MoM for the past three months. We are keeping our 9-10% loan growth estimate for 2014. Our numbers can still be met, assuming growth of at least 1% MoM in 4Q14.

…but asset quality improved.  Absolute gross impaired loans inched down 1% MoM (-3% YoY) with gross and net impaired loan ratios at 1.8% and 1.3% respectively. System loan allowances were relatively unchanged MoM and with that, system loan loss coverage improved MoM to 103.8% from 101.7% at end-September.  

October loan leading indicators weakened MoM, with applications down 6% MoM (-4% YoY) while approvals fell 2% MoM (+13% YoY). The MoM decline in leading indicators was predominantly due to the business segment with business loan applications and approvals down 13% MoM (+10% YoY) and 6% MoM (+24% YoY) respectively. As for the household segment, loan applications rose 1% MoM (-14% YoY –reflecting a surge in residential mortgage applications towards end-2013 before the tighter property measures kicked in), while loan approvals were up 2% MoM (+6% YoY).  

♦  System deposits grew 1.1% MoM (+6.5% YoY). Thus, system loan-to-deposit ratio was broadly stable MoM at 86.6%, as at end-October. 
♦  Average lending rate for banks fell 5bps MoM to 4.67%, which suggests that competitive pressure on asset yields is starting to be felt 
again post July’s overnight policy rate (OPR) hike.  
♦  Investment case. We remain NEUTRAL on the sector with AMMB as our sole BUY call. Valuations appear inexpensive while potential merger and acquisition (M&A) news flow may provide a fillip to share price performance.

Source: RHB