This article first appeared in The Edge Financial Daily on December 5, 2017
Banking sector
Maintain neutral call: October loans continued to ease (for the fourth consecutive month) from the previous month with another 60 basis point (bps) dip to +4.6% year-on-year (y-o-y) at RM1,562 billion. On a month-on-month (m-o-m) basis, loans saw a deceleration by 10bps to 0.1% m-o-m. Household remained resilient at +6.3% y-o-y (for the fourth straight month). Business loans eased by 110bps to +3% y-o-y. Repayments (+17.3% y-o-y versus Sept 17: +4.7%) outpaced disbursements (+8.4% y-o-y versus Sept 17: -2.5% y-o-y) contributed further to weaker loans. On an annualised basis, loans grew by +3.2%, easing by 30bps from the month before. Overall financing in the system (banks and development financial institutions) eased by 20bps to +6.2% y-o-y at RM2,260 billion as growth in corporate bonds of +12% y-o-y to RM552.9 million outpaced the loan growth of 4.4% to RM1,707 million.
Household loans were still the driver for October driven by residential property (up 10bps to +8.9% y-o-y), with higher purchases still easing by 20bps to 0.6% y-o-y. Working capital and mortgages were still the driver for business loans, growing at +4.3% y-o-y and +3.2% y-o-y respectively, with the former easing by 60bps from September 2017 and the latter easing by 50bps.
Loan application reversed momentum, surging by +12.8% y-o-y (Sept 17: +0.3% y-o-y) as applications for both business and household surged ahead at +14.4% y-o-y and +11.2% respectively. (Sept 17: -1.3% y-o-y and +1.9% y-o-y respectively). The rebound in the business segment was led by working capital (+8.4% y-o-y versus Sept 17: 3.8% y-o-y) and construction (+44.9% y-o-y versus Sept 17: +1.1% y-o-y). Application for residential property is still the driver for household applications, surging at +18.9% (versus Sept 17: +7.2% y-o-y). Application for passenger cars continued its declining momentum (albeit easing), falling by 5.3% y-o-y (Sept 17: -13.9% y-o-y).
Loan approval continued to trek southwards, falling by 2.1% y-o-y (Sept 17: -1.7% y-o-y), led by falling business approvals (-11.4% y-o-y versus Sept 17: -0.4% y-o-y) as household approvals rebounded to +10.1% y-o-y (Sept 17: -3% y-o-y). Falling business approvals were dragged by a fall in working capital (-6.3% y-o-y versus Sept 17: +12.5% y-o-y). The rebound in households was led by surging approval of residential property (+14.5% y-o-y versus Sept 17: +2.8% y-o-y). The approval rate of the system was flat at 42.5% in October.
Despite easing loans, deposits improved ahead by 20bps to +4.8% y-o-y to RM1.743 billion. Deposits were driven by business enterprises and individuals at +11.2% y-o-y and +3.8% y-o-y (versus Sept 17: +11.3% y-o-y and +3.7% y-o-y) respectively. Current account, savings account (Casa) growth gained momentum by 70bps to +9.5%, forcing the Casa ratio to improve by 20bps to 26.9%. System excess liquidity to total deposit base improved by 54bps to +11.3% y-o-y, with excess liquidity registering positive traction (since June 15) to +6.2% y-o-y. Overall liquidity in the system is still stable with loan-to-fund (LTF) and loan-to-fund-andequity ratios at 83% and 72.9% respectively (Sept 17: 83.1% and 73.1%). The system loan-to-deposit ratio was down by 40bps to 88.7%.
The three-month deposit rate was up by 1bps to 2.94% and the average lending rate for October was up by 2bps to 4.64%. Hence, the interest spread expanded by 2bps to 1.71%.
Asset quality for October improved y-o-y as the net impaired loan ratio fell by 1bps y-o-y and 3bps m-o-m at 1.19%. In contrast, the gross impaired loan (GIL) ratio was flat y-o-y/-2bps m-o-m to 1.65%. GIL for both business and household fell by 2bps m-o-m to 2.14% and 1.15% respectively. Meanwhile, loan loss coverage fell y-o-y (by 170bps) and higher by 100bps m-o-m 82.1% as impaired loan growth outpaced provisioning at +4.8% y-o-y versus +2.6% y-o-y.
We opine that system loan growth will be beneath 5% for FY17, underpinned by easing of business loans. On a positive note, household loans are still resilient looking likely to drive fourth-quarter demand, supported by the usual pickup in growth at the end of the year by corporates. With liquidity improving and at comfortable levels, we opine that net interest margin compression will be mild, underpinned by cheaper cost of funds arising from lesser pressure on deposit rates and an upward trend in business deposits.
We reiterate our “neutral” call. No favourable horizon ahead in the absence of concrete catalyst. We continue to see a moderating economy and moderate loan growth. We maintain our “market perform” call for most of the banking stocks in our coverage with the exception of Affin Holdings Bhd, Alliance Bank Malaysia Bhd, AMMB Holdings Bhd, CIMB Group Holdings Bhd and RHB Bank Bhd, which are at “outperform” as at current share prices as we see an attractive proposition with a potential total return of more than 10% each. — Kenanga Research, Dec 1