We are keeping our NEUTRAL sector call. May’s banking statistics saw MoM loan growth momentum improved while YoY, system loans expanded by 8.9% YoY. Business and household loans were up 8.8% YoY and 9% YoY respectively. Deposit growth, however, was soft and resulted in system LDR reaching a multi-year high of 87.7%. We also note an uptick in system impaired loans.

MoM system loan growth momentum improved to +0.8% (Apr 2015 loan base was flat MoM) while YoY loan growth inched up to 8.9% vsApril’s +8.8% YoY. Business loans expanded by 8.8% YoY (Apr 2015: +8% YoY), underpinned by: i) loans extended on real estate, ii) finance, insurance and business activities, iii) construction, as well as iv)transport, storage and communication sectors. Meanwhile, household loan growth moderated to +9% YoY (Apr 2015: +9.4% YoY), with growth largely driven by residential mortgages (+13.1% YoY). Compared to a year ago where May 2014 household loan growth was +11.6% YoY, we note that the moderation in growth this year was mainly due to softer growth in loans for the purchase of securities (+4.5% YoY vs May 2014’s+16.8% YoY) and auto loans (1.9% YoY vs May 2014’s 4.1% YoY). Growth in residential mortgages has held up better (13.1% YoY vs May 2014’s 13.6% YoY). Our 2015 system loan growth projection of 8-9% is unchanged.

System loan applications and approvals were down 3% and 4% MoM respectively. YoY, however, loan applications fell 3% but loan approvals inched up 1% YoY. Business loan applications rose 6% YoY (+1% MoM) while business loan approvls rose 37% YoY (+5% MoM). Meanwhile, household loan applications fell 10% YoY (-6% MoM) and approvals were down 18% YoY (-11% MoM), largely caused by lower applications and approvals in loans for the purchase of securities and residential mortgages.

Mild uptick MoM in impaired loans. As of end-May, absolute system impaired loans ticked up 3% Mo vs April, but was down 4% YoY. The MoM uptick was from both household (+2% MoM) and business (+3% MoM) segments. As such, system gross and net impaired loan ratios rose 3bps MoM to 1.59% and 1.20% respectively while system LLCeased to 100.6% as at end-May 2015 from 101.8% at end-Apr 2015.

May system deposits growth moderated slightly to +8% YoY vs+8.3% in Apr 2015. Hence, the system loan-to-deposit ratio rose 90bps MoM to 87.7% (May 2014: 85.4%) – a level unseen since the late 1990s.Thus, we expect the competition for deposits to remain keen, due to the need to manage LDRs as well as regulatory requirements.

Investment case. We remain NEUTRAL on the sector with Public Bank (PBK MK, BUY, TP: MYR21.00) as our sole BUY.

Source: RHB Research - 1 Jul 2015