Banking sector
Maintain market weight: Total loans stood at RM1,349.6 billion for February, up 8.8% year-on-year (y-o-y) while month-on-month growth was also weak, coming in at 0.39%, implying a full-year annualised growth of just 4.4%.

A pick-up in working capital loan growth momentum (10.4% against 8.2%) and stable residential property loan growth (13% against 12.9%) helped offset the slowdown in non-residential property loan growth (14.6% against 15.3%).

Overall loan approvals declined by 0.8% and applications by 17.1%, partially impacted by the timing of the Chinese New Year festive season which fell in February in 2015 versus January in 2014. That said, the more pronounced contraction in loan applications compared with approvals will eventually impact the loan approval pipeline and ultimately loan growth.

With both consumer and business sentiment expected to be further impacted by the implementation of the goods and services tax, we expect loan applications to continue softening over the course of the year.

There was a slight recovery in business loan growth which came in at 7.6% in February 2015 against 7.3% in January 2015. However, overall growth remains relatively weak as it represents a moderation in growth from 2014’s 8.5% growth. Additionally, business loan applications contracted 17.1% y-o-y with the working capital application trend being the key drag (-36.9% y-o-y).

Industry deposits continue to trail loan growth at 8% against loan growth of 8.8%, and this is likely to culminate in persistent pressure on funding costs.

Absolute non-performing loans (NPL) continued to show signs of stabilising, declining 1.4% y-o-y in February this year. Residential and working capital NPL continued to make up the bulk of the system NPL improvement, declining 2.3% and 8.7% y-o-y respectively, while non-residential properties suffered their seventh monthly NPL uptick (38.2% y-o-y).

We maintain our “market weight” call. Malayan Banking Bhd (Maybank) remains our top pick, given its high dividend yield support and strong current account, savings account base which should position the group positively in a rising rate environment.

As for CIMB Group Holdings Bhd its recent share price performance could reverse as we expect some form of potential earnings disappointment arising from: (i) elevated level of provisioning; (ii) subdued capital market pipeline; (iii) moderating loan growth; and (iv) continued net interest margin pressure, especially in Indonesia where liquidity remains tight. — UOBKayHian Research, April 1

This article first appeared in The Edge Financial Daily, on April 3, 2015.