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This article first appeared in The Edge Financial Daily on November 15, 2017

Banking sector
Stick to safe bets, delivery outperformers and event drivers:
Annualised loan growth up to September looked uninspiring at only 3.5%. Loan growth has mainly been supported by residential mortgages, while business loans have dwindled. Non-residential property loans and hire purchase for passenger cars have also been a drag.

This echoes what the banks are telling us on their cautious stance on lending to the commercial property sector due to softness/oversupply seen in this segment and also selectively the notion of cautiousness about hire purchase loans because pricing is back to being irrational. For loan growth to sustain above the mid single-digit level at the very least, business loans will have to recover.

Annualised growth for business loans was at a meagre 1.8% up to September. We understand that corporate repayments have been high, which also weighed on overall loan growth. We believe most banks may fall short of their set loan growth targets for 2017. At this juncture, we expect 2017 loan growth to hover at around 4% to 5% at best.

The residential property loans have been driving overall loan growth (annualised 8.6% growth at end-September). These are largely due to progressive drawdowns from stock of mortgages over the past few quarters; but these are moderating and as such we do not expect the residential property sector to continue growing strongly going into next year.

We are sticking to our conservative picks. In an environment where growth remains a challenge, we  would prefer to stick to safe bets and delivery outperformers; Public Bank Bhd qualifies on this front. On the other hand, we continue to like Malayan Banking Bhd for its high dividend yield and potential restructuring story. We believe it is now a challenge for Malaysian banks to outperform. Indicators such as loan growth recovery, net interest margin sustainability and potential rate hike (expected in the second half of 2018) would be the key catalysts to watch. — AllianceDBS Research, Nov 14

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