We retain our NEUTRAL sector call. June’s banking statistics show improved MoM loan growth momentum while system loans expanded 9.1% YoY. Business and household loans were up 9.5% YoY and 8.7% YoY respectively. We also note a MoM uptick in system impaired loans, mainly stemming from the business segment. Finally, deposit growth continued to lag loan growth, resulting in system LDR rising to 88%.

June’s system loan growth gained pace, up 9.1% YoY and 1% MoM (vs May 2015: +8.9% YoY, +0.8% MoM). Business loans expanded by 9.5% YoY (May 2015: +8.8% YoY), underpinned by loans extended to the real estate; finance, insurance and business activities; construction as well as transport, storage and communication sectors. Meanwhile, household loan growth moderated further to +8.7% YoY (May 2015: +9% YoY), with growth largely driven by residential mortgages (+13% YoY). Compared to Jun 2014’s household loan growth of +11.5% YoY, we note that the decline in growth this year was mainly due to softer growth in loans for the purchase of securities (+ 2.3% YoY vs Jun 2014: +16.8% YoY). Growth in residential mortgages has held up better (13.1% YoY vsJun 2014: 13.6% YoY). Our 2015 system loan growth projection of 8-9% is unchanged.

System loan applications and approvals were up 9% and 23% MoM and 2% and 15% YoY respectively. Business loan applications rose 4% YoY (+5% MoM) while business loan approvals surged 51% YoY (+34% MoM), as loan approvals for the primary agriculture and education, health and other sectors were particularly strong in June. This suggests that business lending activities ahead would be well-supported. Meanwhile, household loan applications were flat YoY (+14% MoM) while approvals were down 7% YoY (+14% MoM) with the decline in approvals largely caused by a 58% YoY drop in loan approvals for the purchase of securities.

June’s absolute system impaired loans ticked up 3% MoM vs May2015’s, but were flat YoY. The MoM uptick was due to the business segment (+5% MoM) while household asset quality was stable. As such, system gross impaired loan ratio rose by 3bps MoM to 1.62%, while system loan loss coverage (LLC) eased to 97.5% as at end-Jun 2015 from 100.6% at end-May 2015.

June’s system deposit growth moderated slightly to +7.7% YoY vs+8% in May 2015. Hence, system loan-to-deposit ratio (LDR) rose 30bps MoM to 88% (Jun 2014: 85.8%). Thus, we expect deposit competition 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 - 3 Aug 2015