Banking industry’s impaired loan formation stable with GIL ratio holding up

This article first appeared in The Edge Financial Daily, on March 6, 2018.
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Banking sector
Maintain overweight:
The sector’s loan growth rose to 4.2% year-on-year (y-o-y) in January 2018, from 4.1% y-o-y in December 2017. This was contributed by a stronger household loan growth while non-household loans slowed down slightly. January 2018 saw household loan growth rise to 5.3% y-o-y compared with 5.1% y-o-y in December 2017. The improvement was contributed by a stronger pace of loans for purchase of securities, personal loans and credit cards. Meanwhile, non-household loan growth eased to 2.7% y-o-y from 2.8% y-o-y in the preceding month. The slowdown was due to a slippage in the y-o-y growth of working capital loans to 0.8% y-o-y (December 2017: 0.9% y-o-y). On a year-to-date basis, industry loan growth was 5.5% annualised. We maintain our loan growth projection of 5% for 2018 with expectation of an improvement in corporate loans while household loan growth is expected to remain stable.

Higher growth of loan applications is supported by an increase in loan demand from households and non-households. January 2018 saw an increase in the y-o-y growth of industry loan applications to 25.2% versus -2.1% in December 2017. Household and non-household loan applications grew 26.2% y-o-y and 24.6% y-o-y respectively in January 2018 (December 2017: 6.8% y-o-y and -12.5% y-o-y). By loan purpose, the increase was broad-based.

Industry deposits growth in January 2018 accelerated to 4.4% y-o-y, up from 4.1% y-o-y in December 2017. This was contributed by a stronger growth in business enterprise deposits. Business enterprise deposit growth expanded to 9.4% y-o-y while individual deposits slipped to 2.9% y-o-y versus 3.9% y-o-y in the preceding month. Industry current and savings account (CASA) growth slowed down to 8.5% y-o-y versus 9.4% y-o-y in December 2017. CASA ratio for the sector continued to hold up at 27.8%. Growth in the more expensive fixed deposits (FDs) accelerated for the third consecutive month to 4.5% y-o-y. Industry loan-to-deposit (LD) ratio remained stable at 89.6% while loan-to-fund ratio and loan-to-fund-and-equity ratio fell 40 basis points (bps) and 80bps month-on-month (m-o-m) to 83.6% and 72.9% respectively.

The weighted average lending rate (ALR) and base rate for commercial banks rose to 5.27% and 3.76% respectively due to the overnight policy rate (OPR) hike of 25bps in January 2018. The weighted ALR and base rate for commercial banks rose to 5.27% and 3.76% respectively. Meanwhile, the base lending rate (BLR) increased to 6.74% from 6.68% in the previous month. The rise in rates was due to the increase in OPR by 25bps to 3.25% in January 2018. Interest spread (between the weighted average lending rate and three-month FD rate) slid 2bps m-o-m to 2.25%.

The industry gross impaired loan (GIL) ratio is stable at 1.5% with a marginal increase in impaired loans by 0.6% m-o-m. No change to the sector’s GIL ratio at 1.5% while the net impaired loan (NIL) ratio improved to 0.92% versus 1.1% in the preceding month. The industry’s impaired loans were marginally higher by 0.6% m-o-m or RM147 million in January 2018. The sector’s loan loss cover improved to 97.5%.

Capital market activities continued to be active with higher issuance of new bonds and sukuk than equities. The level of net funds raised in the market by the private sector was higher in January 2018 at RM6.83 billion compared with RM106 million in January 2017. New issues of corporate bonds/sukuk were healthy at RM9.53 billion in January 2018 versus RM1.58 billion in January 2017.

Meanwhile, new issuance of shares remained low at RM101 million in January 2018.

Market indicative yields for three-, five- and 10-year Malaysian government securities rose by 5bps, 5.2bps and 4.2bps respectively in January 2018 due to the increase in OPR by 25bps.

Maintain “overweight” with buys on RHB Bank Bhd (fair value [FV]: RM6.30 per share), Public Bank Bhd (FV: RM24.30 per share) and Alliance Bank Malaysia Bhd (FV: RM4.40 per share). — AmInvestment Bank, March 5.