This article first appeared in The Edge Financial Daily on July 2, 2019
Banking sector
Maintain neutral: Loans in May 2019 saw upticks year-on-year (y-o-y) and month-on-month (m-o-m). Loans rose 10 basis points (bps) to +4.6% y-o-y or RM1,688 billion versus +4.5% y-o-y or RM1,682 billion in April 2019. From being flat in the previous month, loans grew +0.3% m-o-m. While household loans were up 40bps to +5.6%, business remained to be a dampener, moderating 20bps to +3.6% y-o-y for May 19. On an annualised basis, loans climbed another 50bps to +2.1% for May 19.
Household loans remained resilient at +5.6% y-o-y, supported by mortgages rising 20bps to +7.2% y-o-y, and credit card usage (+160bps to +3.8% y-o-y), with personal financing still resilient at +5.8% versus +5.8% y-o-y in April 2019. A moderation in business was underpinned by a moderating purchase of fixed assets of 11% y-o-y versus +13% y-o-y in April 2019, and other purposes (+10% y-o-y versus +5% y-o-y in April 2019). Working capital rose 20bps to +3% y-o-y.
In May 2019, repayments (+17% versus April 2019’s 14%) still outpaced disbursements (+13% versus April 2019’s 10%), with business (+19% versus April 2019’s +16%) repayments outpacing disbursements, but the household segment bucked the trend; disbursements (+16% versus April 2019’s +8%) outpaced repayments (+10%). However, business disbursement was still at double digits for the second consecutive month.
Overall net financing in the system reversed its downward trend, adding 110bps to +5.9% y-o-y with loans adding 10bps to +4.9% y-o-y, but corporate bonds were higher at 530bps or +11.1% y-o-y. Loan applications still improved (+15% y-o-y versus +6% y-o-y in April 2019) to RM78,841 million. Business and household loan applications remained on an uptrend, rebounding +12% and +17% y-o-y versus +10% and +1% y-o-y in April 2019 respectively. Catalysts for business were a surge in purchase of non-residential property (+13% y-o-y versus a flat rate in April 2019) to RM8,450 million. A surge in household loans was led by residential mortgages (+37% versus April 2019’s +12%) to RM25,602 million.
Approvals were still on an uptrend, surging another 540bps to +10% y-o-y — business at +4% y-o-y versus +2% y-o-y in April 2019 to RM17,604 million, and household loans +18% y-o-y versus +8% y-o-y in April 2019 to RM17,121 million. Elevated approvals for household loans were led by residential properties (+13% y-o-y versus +2% y-o-y in March 2019) and hire-purchase (+7% versus +10%). Household loan approvals were led by mortgages (24% y-o-y versus +13% y-o-y in April 2019). Loan approvals for the business segment were underpinned by purchase of securities (+81% y-o-y) to RM3,491 million. With applications outpacing approvals, the approval rate in the system climbed 180bps to 44%, led by business approvals rising 650bps to 47%. Household loans were still tight at -280bps to 41%, indicating banks remained selective on assets in the household segment.
Excess liquidity was still strong, as deposits outpaced loans in the same pace in April by 150bps (+6.1% y-o-y versus +6% y-o-y in April 2019), thereby excess liquidity remained flat at +11.5% or 19% y-o-y. The uptick in deposits was driven by deposits from the federal government (64% y-o-y to RM31,899 million) and individuals (+11% to RM728,065 million). Business enterprises saw a 50bps drop (-0.5% y-o-y) to RM634,531 million. Loan-to-fund and loan-to-deposit ratios were relatively stable at 82% and 88% respectively. The fall in low-cost deposits from business enterprises, coupled with a current and savings accounts ratio still below 27%, will put additional pressure on net interest margin (NIM) as funding costs intensify.
The average lending rate dipped 11bps to 4.93%, while three-month deposits fell 24bps to 2.93% due to the recent overnight policy rate cut. While the deposit rates outpaced lending rates, the reprieve from NIM pressure will be short-lived. Gross impaired loans (GIL) remained stable at 1.5% with asset quality improving as impaired loans fell 1% y-o-y. Business GIL remained stable at 1.97% but household loans rose 1bps to 1.07%, led by a 5bps uptick in personal financing to 1.86%.
Domestic risks are looking stable despite challenging external conditions. Pending our strategy report to be released this week, we maintained our “neutral” view; a moderate loan growth still holds with soft capital markets. However, valuations are seemingly more attractive with most of the banking stocks under our coverage have an “outperform” rating — Affin Bank Bhd with a target price (TP) of RM2.40, Alliance Bank Malaysia Bhd (TP: RM4.25), AMMB Holdings Bhd (TP: RM5.10), CIMB Group Holdings Bhd (TP: RM6.25), Malayan Banking Bhd (TP: RM10.35) and Malaysia Building Society Bhd (TP: RM1.15). Others are “neutral” — BIMB Holdings Bhd (TP: RM4.80), Hong Leong Bank Bhd (TP: RM20.05), Public Bank Bhd (TP: RM24.10) and RHB Bank Bhd (TP: RM6.05). — Kenanga Research, July 1