This article first appeared in The Edge Financial Daily on April 2, 2019

Banking sector
Maintain neutral: Bank Negara Malaysia reports that total loans and advances softened to 5% year-on-year (y-o-y) (-0.2% month-on-month [m-o-m]) in February 2019 versus a growth of 5.5% a month ago.

The yearly increase in demand for credit was mostly underpinned by the consumer segment, which widened by 5.4% y-o-y.

Compared to the growth of 5.7% in January 2019, consumer loans eased sequentially. Accounting for some 60% of total consumer loans, the slowdown was largely due to residential mortgages, which rose at a softer pace of 7.1% y-o-y (+0.3% m-o-m).

This was followed by personal loans (+7.2% y-o-y, -0.1% m-o-m) and drawdowns for the purchase of securities 6.2% y-o-y (-0.3% m-o-m).

Loans for passenger car purchase were lacklustre, slipping 0.6% y-o-y and -0.3% m-o-m.

The advances for credit cards paced up, rising 2% y-o-y during the month.

The momentum for business loans also weakened. While we estimate that business loans were largely supported by the small and medium enterprise segment (+0.4% m-o-m and 8.3% y-o-y), we believe that other business loans, such as the larger corporate enterprises climbed at a muted pace of 2.8% y-o-y (-0.7% m-o-m).

By sub-segment, yearly demand for working capital improved by 5.2% y-o-y (-0.3% m-o-m). By sector, yearly demand for loans in the primary agriculture segment contracted for the 12th straight month. Total advances for the segment slipped 3.8% y-o-y (-0.3% m-o-m). Demand for loans for the mining and quarrying and education and health segments reversed gains in January to contract by 21.3% y-o-y (18.6% m-o-m) and 1.3% y-o-y (+0.2% m-o-m) respectively.

Loans drawn down in the transport, storage and communications remained healthy, broadening by 5.8% y-o-y (+0.5% m-o-m).

The drivers of business loans include wholesale and retail trade (+7.1% y-o-y), manufacturing (+9.7% y-o-y) and construction (+10.7% y-o-y). Also continuing their positive momentum — finance, insurance and business activities — registered positive y-o-y growth of 7% y-o-y.

Meanwhile, year-to-date net funds raised by the private sector via the issue of new shares and new issue of debt securities (excluding redemptions) rose to RM9.1 billion versus RM6.9 billion a year ago.

Loan applications fell by 14.0% y-o-y in February. M-o-m, they fell  by 29.8%. The applications for consumer and business loans contracted by 8.4% y-o-y and 20.7% y-o-y respectively.  By segment, the applications to buy residential mortgages and personal uses also fell during the month, down 0.7% y-o-y (-27.9% m-o-m) and -15.5% y-o-y (-30.6% m-o-m). The applications for credit cards declined by another 17.7% y-o-y (-28.2% m-o-m), which we believe was spurred by the new sales and services tax imposed on the cards, while yearly change in the application for hire purchase (HP) loans decreased for the sixth consecutive month by 12% y-o-y (+31.8% m-o-m).

Total loans approved declined in February 2019. The 6.7% y-o-y reduction in loan approvals was again mostly driven by the consumer segment (-13.7% y-o-y). On the other hand, yearly approvals for the business segment improved (+4.4% y-o-y). The overall approval rate stood at 46.9% (February 2018: 43.3%), supported by business and consumer approval rates of 48.4% and 45.9% respectively.

By major sub-segments, approval for the purchase of residential properties and non-residential properties stood at 42.1% and 37.8% versus 46% and 31.3% in February 2018 while the approval for HP loans stood at 63.6% versus 62% a year ago.

Total deposits (excluding repurchase agreement) advanced by 6% y-o-y and 0.3% m-o-m. Current account savings account (Casa) balances in commercial banks also accelerated at a stronger pace of 1.9% y-o-y (+1.0% m-o-m).

The Casa ratio stood at 26.4% versus 27.5% a year ago. Reporting one month in arrears, the liquidity coverage ratio rose y-o-y to 144% (January 2018: 132%) while the loan-to-fund ratio stood slipped to 82.8% (February 2018: 83.5%). The average lending rate was of little changed m-o-m at 5.43% February 2019 (January 2019: 5.44%), but increased by a slight two basis points as compared to 5.41% a year ago.

Elsewhere, the banking system’s capital buffers remained ample with common equity tier and total capital ratio of 13.6% and 17.9% respectively.

We maintain our 2019 loan growth projection at 5% — underpinned by business and consumer loan growth of 5.2% and 4.8% respectively. Despite some acceleration in business loans in the earlier part of the year, we gather that business activities remain in cautious mode. In the consumer segment, we  foresee sentiment to remain modest, going forward, underpinned by anticipation of cautious spending following bleak economic outlook and rising cost of living. We reiterate our “neutral” stance on the sector. “Buy” CIMB and Affin. “Hold” Maybank, Hong Leong Bank, AMMB and Alliance Bank. “Sell” maintained on Public Bank and RHB Bank. — TA Securities, April 1