This article first appeared in The Edge Financial Daily on January 3, 2019
Banking sector
Maintain neutral: Banking data in November were decent. System loans grew 6.2% year-on-year (y-o-y), beating expectations while deposits advanced 6.5%. Also, asset quality remained steady, not showing any signs of deterioration as the gross impaired loan (GIL) ratio is now at the lowest level on record. However, there were no strong positive leads and we reckon things may not be entirely upbeat for 2019. Currently, sector valuation is fair and hence, we stay neutral. RHB (target price: RM6.60) is our top pick for its attractive risk-reward profile, trading at -1 standard deviation to its five-year mean price-to-book value and potential for dividend upside.
November’s system loan growth stayed robust, coming in at 6.2% y-o-y. This was supported by both the household (HH) (+5.7%) and business (Biz) (+6.3%) segments. In HH, the expansion was from home mortgages (+7.7%) and personal financing (+7.8%), while in Biz, lumpy “other purpose” lending (+19.7%) and construction loans (+10.2%) fuelled the rise.
Overall, it is the fifth consecutive month of quicker acceleration (>5%), bringing 11 month of 2018 annualised loan growth to 5.5%. This surpassed our 2018 expectation of 4.5%-5% and with only one month left, we believe it will settle at +5%-5.5%. That said, we still see 2019 loan growth tapering to 4.5%-5% given the lack of strong positive leads in both the HH and Biz segments
Loan applications decreased 24.3% y-o-y, making it the second back-to-back month of contraction; weakness came from both the HH (-14.3%) and Biz (-34.7%) segments. Also, loan approvals fell 6.7% but were mainly dragged down by the HH side (for car purchases, -19.8%, and credit card, -32%).
System deposits rose a commendable 6.5% y-o-y but were driven by more expensive products like fixed, foreign currency and money market deposits. However, current account savings account grew a mere 3.2%.
During the month, the loan-to-deposit ratio (LDR) fell to 87.6% (-1 percentage point versus June’s elevated level) as deposit growth outpaced the increase in loans.
Considering the LDR is hovering close to its 10-year high, we think deposit competition could continue into 2019. That said, the rivalry should not be too intense to avoid excessive negative carry from idle deposits. — Hong Leong Investment Bank Research, Jan 2