We keep our NEUTRAL sector call. October’s loan growth eased to 9.1% YoY (Sep 2015: 9.7%) while deposits contracted 1% MoM, leading to system LDR rising to 91%. The high LDR suggests deposit competition would be keen in 4Q15, exacerbated also by banks’ seasonal deposit drive. However, asset quality was marginally better MoM while leading indicators rebounded, although both trends could be temporary.

October’s system loan growth moderated further MoM to 0.4% (vs Sep 2015: +0.8% MoM), while YoY growth eased to 9.1% compared with September’s +9.7% YoY. The softer pace of expansion was mainly due to the business segment, where growth eased further to 10.7% YoY (Sep 2015: +11.9% YoY) due to a slowdown in growth from the manufacturing, wholesale and retail trade, as well as finance, insurance and business activities sectors during the month. Meanwhile, household loan growth was relatively more resilient at +8% YoY (Sep 2015: +8.1% YoY), led by residential mortgages (+12.2% YoY). Growth in auto loans and consumption credit remains at low to mid single-digit, consistent with the weaker consumer sentiment. YTD, system loan growth was 6.7%, translating to an annualised growth of 8%, ie in line with our 7.5-8.5% estimate for 2015.

Leading indicators rebounded, but could be temporary. System loan applications rose 8% MoM (+13% YoY), while loan approvals jumped 11% MoM (-4% YoY). The MoM pickup came from both the business and household segments. Business loan applications and approvals were up 12% MoM (+23% YoY) and 15% MoM (+3% YoY) respectively. Meanwhile, household loan applications increased 4% MoM (+3% YoY) while approvals increased 8% MoM (-10% YoY). Despite the pickup, we are wary that this could be seasonal and thus, unlikely to be sustained.

October’s absolute system impaired loans inched down 1% MoM (+2% YoY). As compared to end-2014, absolute gross impaired loans were up 4%. System gross impaired loan and loan loss coverage (LLC) ratios, however, were largely unchanged MoM at 1.6% and 98% respectively. Generally, we think the asset quality cycle has bottomed out and continue to expect impaired loans to trend up ahead given weaker macroeconomic conditions, the build-up of household leverage in recent years, low commodity prices and softer consumer spending.

October’s system deposits contracted 1% MoM (+4% YoY) with the softness broad-based, especially deposits from the Federal Government. Hence, the system loan to deposit ratio (LDR) rose further (+110bps MoM) to 91.2% (Oct 2014: 86.6%). As such, we expect deposit competition to remain keen, especially in 4Q15, 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, NEUTRAL, TP: MYR19.00) as our preferred pick.

Source: RHB Research - 1 Dec 2015