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This article first appeared in The Edge Financial Daily on May 3, 2019

Banking sector
Maintain neutral:
The latest banking data for March 2019 remained unenthusiastic. System loan growth slowed to 4.9% year-on-year (y-o-y), which is below our expectations, while deposit growth tapered to 5.3%. Current account savings account growth picked up momentum (2.6%), but overall funding cost continued to be expensive and net interest margin (NIM) outlook is still challenging. However, asset quality was robust with gross impaired loan (GIL) ratio improving to 1.46%. Overall, positive leads were still missing and hence, we find it difficult to be bullish on the sector.

Our preferred pick is Malayan Banking Bhd (Maybank) with a target price (TP) of RM10.50. Other “buy” recommendations are RHB Bank Bhd (TP: RM6.60) and BIMB Holdings Bhd (TP: RM5.20).

System loan growth slowed to 4.9% y-o-y (February 2019: 5%); the business segment remained unenthusiastic at 4.1% while household sustained at 5.3%. The slump in the business segment was caused by loan repayments (6.8%) outpacing disbursements (2.9%); the 4.1% growth came from lumpy “other purpose” lending (11.4%) and working capital loans (4.3%).

In the household segment, home mortgages (7.1%) and personal financing (6.5%) were the primary growth contributors. Overall, March system loan growth was the fourth successive month of dullness. For 2019, we still have a 4.5% to 5.0% target, as we see repayment rates normalising downwards in the coming months.

Loan applications continued to be lethargic (-6%) (February 2019: -14.1%), dragged by poor business (-8.5%) and household (-3.9%) demand. However, loan approvals turned positive at 6.3% (February 2019: -6.7%) given more generous business lending (working capital 14.3% and non-residential properties 65.2%).

Loan-to-deposit ratio (LDR) continued to be elevated at 87.3% (the highest was 89% in February 2018). Since LDR is near its 10-year high, we see tendency of competition for deposits not abating, albeit less intense compared to two to three quarters ago as banks strive to avoid excessive negative carry.

Gross impaired loans (GIL) ratio remained steady and robust at 1.46% (February 2019: 1.48%) — the lowest level on record. Overall, we expect asset quality to stay relatively benign in 2019, backed by higher proportion of new loans versus slower formation of new impaired loans.

The average lending and three-month board fixed deposit rate moved in opposite direction, with the former up one basis point (bps) and the latter down 1bps. In turn, the spread broadened 2bps to 1.88%. However, we still see challenging NIM outlook on a sequential basis given diminishing flexibility to optimise LDR. Also, banks are stuck with higher cost of funds due to prior retail fixed deposit competition cycle.

There are still no catalysts to spur strong sector-wide growth in the offing. Also, there are risks of a potential overnight policy rate cut and muted capital market activities. — Hong Leong Investment Bank Research, May 2

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