Latest  Trends

• Loan growth in Dec 15 slowed further to 7.9% yoy (vs. 8.4% in Nov 15). Growth at the business segment slowed to 8%, while growth at the household segment moderated marginally to 7.7%.

• Leading indicators were mixed, with loan applications increasing by 0.7% yoy to RM63.4bn, while loan approvals declining by 0.6% yoy. The approval rate jumped above 50% (at 53% in Dec 15) for the first time since Jun 15.

• LDR and net LDR increased to 86.5% and 85.2% from 86.3% and 84.9% in Nov 15, with deposit-loan gap narrowing to RM225.9bn. While liquidity still ample to fund domestic economic growth, high LD ratio could limit loans growth albeit still supportive of credit expansion.

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

Our Take

• Our loan growth projection is cut to 7.5%for 2016 as we cut our GDP growth to 4.2% after Budget recalibration. We believe slower growth at the household segment will be offset by loan growth from the business segment (underpinned by more project awards and working capital requirement).

• While liquidity is still ample to support economic growth, higher LD ratio could limit loans growth and pressure margin.

• Low ALR (which is just 12bps above its all-time-low) and intense competition for deposits and higher LD ratio will continue to exert pressure on margin.

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

Risks

• Risk of recession and its impact on asset quality, portfolio losses (MTM and realized), as well as non-interest income growth.

Rating

NEUTRAL

• Posi tives – Best proxy to 11MP and RAPID, domestic consumption (albeit slower) and economy; strong asset quality; robust capital ratios; and capital management.

Negatives

• Competitive pressure on margin, GST impact on consumer sentiment, tougher environment increase chances of higher defalts and portfolio losses from foreign outflow.

Top Picks

• Maybank and RHB Cap. We have a trading buy call on CIMB.

Source: Hong Leong Investment Bank Research - 2 Feb 2016