This article first appeared in The Edge Financial Daily, on January 5, 2016.

Banking sector
Maintain neutral: Loan growth in November 2015 slowed further to 8.4% year-on-year (y-o-y) (versus 9.1% in October 2015). Both business and household segments registered slower growth of 8.7% and 7.8% respectively. Leading indicators were down on a month-on-month (m-o-m) basis, with applications declining by 1.4% to RM71.5 billion, while approvals declined by 11% to RM31.4 billion. Approvals rate remained below the 50% mark, but improved from record lows.  

Loan-to-deposit ratio  (LDR) and net LDR improved to 86% and 84.6% in November 2015. Excess liquidity expanded to RM233.9 billion in November last year. While liquidity is still ample to fund domestic economic growth, high LDR (despite declining on m-o-m basis) could limit loan growth albeit still supportive of credit expansion. 

The average lending rate (ALR) was lower, but spread was higher. Asset quality, on the other hand, remains intact. 

We keep 2015 loan growth projection at 8% despite the stronger year-to-date (YTD) growth given a higher base, slower applications growth, a near-record low approval rate and a higher LDR. Expectations of a stronger business segment mitigating a slowdown in household spending materialised, but challenges remain from both internal and external headwinds, as well as weaker leading indicators. 

While liquidity is still ample to support economic growth, the higher LDR could limit loan growth and pressure margin. The decline in the ALR to only five basis points is an above all-time low, intense competition for deposits and higher LDR  will continue to exert pressure on margin. 

Solid asset quality and robust capital ratios will support growth and capital management, especially with a dividend reinvestment plan. 

Risks include the risk of recession and its impact on asset quality, portfolio losses, as well as non-interest income growth. 

Positives include being the best proxy to the 11th Malaysia Plan and refinery and petrochemical integrated development, domestic consumption (albeit lower), strong asset quality, robust capital ratios and capital management. 

Negatives include competitive pressure on margin, the goods and services tax  impact on consumer sentiment, and tougher environment increase chances of higher defaults and portfolio losses from foreign outflows. Top picks are Malayan Banking Bhd, RHB Capital Bhd and CIMB Bank Bhd. — Hong Leong Investment Bank Research, Jan 4