We retain our NEUTRAL sector call. July’s loan growth momentum slowed MoM mainly due to the festive season but YoY, system loans expanded 9.7%. Business and household loans were up 11.2% YoY and 8.6% YoY respectively. Asset quality was stable but system deposit base contracted MoM, resulting in system LDR rising to 89.3%. Hence, we expect banks to continue facing funding cost pressures.

July’s s ystem loan growth eased MoM to 0.6% (vs Jun 2015: +1% MoM) mainly due to the Hari Raya festivities, but YoY growth rose to 9.7% compared with June’s +9.1% YoY. Business loans expanded by 11.2% YoY (Jun 2015: +9.5% YoY), underpinned by loans extended to the real estate; finance, insurance and business activities; construction as well as transport, storage and communication sectors. As noted in our previous reports, leading indicators for business loans were healthy and these appear to have translated to loan growth. Meanwhile, household loan growth was broadly stable at +8.6% YoY (Jun 2015: +8.7% YoY), with growth largely driven by residential mortgages (+13% YoY). YTD, system loan growth was 4.2%, translating to an annualised growth of 7.2%. Amid a challenging outlook ahead and the recent downward revision to our GDP forecast, we have tweaked down our 2015 system loan growth projection to 7.5-8.5% from 8-9%.

System loan applications and approvals were mixed with loan applications up 2% MoM/7% YoY but loan approvals fell 15% MoM/1% YoY. Applications for business loans stayed healthy at +9% MoM/+11% YoY while approvals fell 20% MoM but was up 22% YoY. It will be interesting to see how sustainable the leading indicators trends are ahead. Meanwhile, household loan applications fell 5% MoM (+3% YoY) while approvals were down 9% MoM and 15% YoY. The YoY decline in approvals was mainly caused by lower loan approvals for the purchase of residential mortgages (-18% YoY) and securities (-44% YoY).

July’s absolute system impaired loans broadly stable, ie flat MoM and YoY. As such, system gross impaired loan and loan loss coverage(LLC) ratios were largely unchanged MoM at 1.6% and 97% respectively.

July’s system deposit dropped 2% MoM due to lower deposits from financial institutions and business enterprises. Hence, YoY deposit growth eased to 4.5% (Jun 2015: 7.7%) while system loan-to-deposit ratio (LDR) rose 130bps MoM to 89.3% (Jul 2014: 85.5%). 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 - 1 Sep 2015