We retain our NEUTRAL sector call. Aug’s loan growth gained momentum with system loans expanding 10.2% YoY. Business and household loans were up 12.8% YoY and 8.3% YoY respectively. Asset quality was stable but deposit growth continued to lag loan growth, resulting in system LDR rising to 90.4%. Hence, we expect banks to continue facing funding cost pressures.

Aug’s system loan growth picked up pace MoM to 1.2% (vs Jul 2015: +0.6% MoM, partly impacted by the Hari Raya festivities), while YoY growth rose to 10.2% compared with Jul’s +9.7% YoY. Business loans continue to underpin system loan growth, expanding by 12.8% YoY (Jul 2015: +11.2% YoY) driven by lending to the primary agriculture, mining and quarrying as well as real estate sectors during the month. 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 moderated further to +8.3% YoY (Jul 2015: +8.6% YoY), with the easing growth momentum largely broad based. YTD, system loan growth was 5.5%, translating to an annualised growth of 8.2%, ie. in line with our 7.5-8.5% estimate for 2015.

System loan applications and approvals were mixed with loan applications up 1% MoM/3% YoY but loan approvals fell 4% MoM/9% YoY. System loan applications were driven by the business segment (+5% MoM/+6% YoY) while household loan applications were down 2% MoM (flat YoY). In terms of loan approvals, the business segment saw approvals fall 9% MoM (flat YoY) whereas household loan approvals were broadly stable MoM but down 15% YoY. Should the momentum for business loan approvals continue to soften MoM, we may see the strong growth in business loans reverse ahead.

Aug’s absolute system impaired loans was broadly flat MoM and YoY. As such, systemgross impaired loan and loan loss coverage (LLC) ratios were largely unchanged MoM at 1.6% and 97.6% respectively.

Aug’s system deposit flat MoM with higher deposits from the various holders offset by the drop in deposits from financial institutions while YoY deposit growth was stable at 5%. Hence, system loan-to-deposit ratio (LDR) rose by another 100bps MoM to 90.4% (Aug 2014: 86.3%). 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: MYR19.00) as our only BUY.