We are keeping our NEUTRAL sector call. Banking statistics in March saw system loans expanding by +9.2% YoY (Feb ‘15: +8.8% YoY). Deposit growth also gathered pace (+9% YoY vs. Feb ’15: +8.3% YoY).We await the upcoming 1Q15 reporting season to gauge the extent banks have been paying up for deposits. Finally, system asset quality was broadly stable.

• System loans expanded 9.2% YoY. The system loan growth in March picked up pace with MoM growth at 0.9% (Feb ‟15: 0.4%) while YoY growth rose to 9.2% vs. 8.8% in Feb ‟15. The stronger growth in Marchwas mainly driven by lending to businesses (+8.5% YoY vs. Feb „15: +7.6% YoY), underpinned by loans extended to the real estate (21% YoY), construction (+13% YoY) and transport, storage and communication (+14% YoY) sectors. Meanwhile, household loan growth was relatively stable at +9.8% YoY, led by residential mortgages (+13% YoY). No change to our 2015 system loan growth projection of 8-9%, down from 9.3% in 2014 with growth constrained by more stringent rules on lending to households and curbs on the property market.
• Loan leading indicators rebound. Not surprisingly, system loan applications and approvals were up 50%/36% MoM respectively, following the shorter working month in February; YoY, however, loan applications slid 4% but loan approvals inched up 2%. Business loan applications fell 9% YoY (+61% MoM) but business loan approvals rose 13% YoY (+48% MoM). Meanwhile, household loan applications were flat YoY (+41% MoM) while approvals were down 7% YoY (+26% MoM).
• Slight improvement in asset quality MoM. As of end-Mar „15, absolute system impaired loans was down 1% MoM and 2% YoY. Relative to end-2014, absolute system impaired loans ticked up 1%. These figures suggest that domestic asset quality has been stable. System gross and net impaired loan ratios stood at 1.63% and 1.22% respectively as at end-Mar „15. However, we note that provision levels have declined and thus, system loan loss coverage declined to 98.7% as at end-Mar ‟15 from 101% at end-Dec ‟14 due to lower individual allowances.
• Mar system deposits growth was better at 9% YoY vs. +8.3% in Feb‘15 while system loan-to-deposit ratio declined to 86.6% from 87.4% in Feb. Generally, system deposit growth has been gathering pace since the low of +5.6% YoY back in Aug ‟14. We think it would be interesting to see in the upcoming 1Q15 reporting season to what extent the banks have been paying up for deposits.
• Average lending rate of banks stayed relatively stable MoM at 4.7%while the average base rate of banks stood unchanged at 3.9%.
• Investment case. We remain NEUTRAL on the sector with Public Bank (PBK MK, BUY, TP: MYR21.00) our sole BUY.