We keep our NEUTRAL sector call. 2015 system loan growth ended on a softer note at .9% YoY s 93% YoY in 2014. With loan applications and approvals flat YoY, we expect 2016 loan growth to moderate further to 6-7% YoY. Deposit growth remained weak (+2% YoY), which will likely keep funding cost under pressure. On the flipside, asset quality was stable MoMbut loan loss coverage levels deteriorated further.

December’s system loan growth ended on a softer note, with YoY growth easing to 7.9% compared with November’s 8.4%. That said, the growth was in line with our 7.5-8.5% expectation. Business loan growth softened further to 8% YoY (Nov 2015: +9.2% YoY), with the moderation being largely broad-based. Meanwhile, household loan growth was relatively more stable at +7.7% YoY (Nov 2015: +7.8% YoY).

Leading indicators flat, suggesting further moderation in loan growth ahead. System loan applications were up 1% YoY while loan approvals declined 1% YoY. Credit demand from the business sector was encouraging, with business loan applications and approvals up 10% YoY and 25% YoY respectively. However, this was offset by household loan applications dropping 6% YoY while approvals slipped 19% YoY – mainly from the residential mortgage segment, weighed down by the various macro prudential measures Bank Negara had introduced in recent years to rein in household indebtedness. As such, we expect system loan growth to continue its downtrend and forecast 2016 loan growth to moderate further to between 6% and 7%.

December’s absolute system impaired loans stable MoM (+5% YoY). Compared agains end-Sep 2015, absolute gross impaired loans were also stable for both business and household segments. For the household segment, although asset quality for unsecured financing (personal loans and credit cards) deteriorated QoQ, this was offset by an improvement in asset quality for mortgage and auto financing. System gross impaired loan ratio was largely unchanged MoM at 1.6% (Dec 2014: 1.6%), but loan loss coverage (LLC) declined to 96% from 97% in November (Dec 2014: 101%). Notwithstanding the above, we retain our view that 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. System deposits rose 1% MoM (+2% YoY), led by deposits from financial institutions, business enterprises and individuals. We note that BNM has excluded financing funded by Islamic investment accounts from the loan base.

Consequently, the system loan to deposit ratio (LDR) stood at 88.7%, up from the restated LDR in Nov 2015 of 88.3% (previously 91%).Investment case. We remain NEUTRAL on the sector, with Public Bank (PBK MK, NEUTRAL, TP: MYR19.00) as our preferred pick

Source: RHB Research - 2 Feb 2016