October saw loan growth picking up by 0.6% mom (driven by expansion in business and household loans). Subsequent to our recent earnings revision, we are now targeting a 4-4.2% system loan growth for 2016 and 2017. Repayments of business loans, shift to the corporate bond market, poorer consumer sentiment and cautious-lending continue to moderate system loan growth. Maintain NEUTRAL; our top sector pick is Public Bank.

Oct16 system loan growth still subdued, at 3.3% ytd

The Oct16 system loan growth (+3.3% ytd, +4.5% yoy, +0.6% mom Fig 1) remains subdued, averaging an annualized loan growth of 4% for 2016. Despite Bank Negara Malaysia’s 25bps cut in the OPR on 13 July 2016, we have not seen a meaningful pick-up in loan applications, approvals and disbursements. However, approvals in Oct16 was up +14.4% mom driven by higher business loan approvals in the retail/trade and transportation sectors. The overall subdued system loan growth was attributable to a few factors, such as: i) higher repayments of business loans; ii) shift to the corporate bond market (as reflected by the robust issuance of infrastructure project-related bonds); iii) poorer consumer sentiment; and iv) banks’ cautious approach. Subsequent to our earnings revisions, we are forecasting a 2016 loan growth of 4.0% and 2017 loan growth of 4.2% (based on 4.6% growth from the household sector and 3.7% from the business sector). In our view, the strength in the domestic economy, sufficient liquidity in the banking system (Fig 20- 22) and an accommodative monetary policy will continue to support loan growth.

Lending rates trended lower post OPR cut

The weighted average base rate of commercial banks stabilized at 3.6% since Aug16 (Fig 18-19). We believe that this remains positive to stimulate lending in the household segment, though most banks remain cautious in lending to the general mass consumer group. For business loans, the expected commencement of some major infrastructure projects in 4Q16 and throughout 2017 will continue to drive industry loan growth. As a reference, we have also included a list of the latest base rates, base lending rates and indicative effective lending rates of the financial institutions, Islamic financial institutions and development financial institutions (Fig 30-32).

Rise in impaired loans and R&R loans offset loan loss cover

The industry loan-loss cover (LLC) was down 560bps to 83.8% in Oct16 as from 89.4% in Sept16 due to a 9.4% mom decline in collective allowances while the system gross impaired loans was up 0.6% mom and 7.9% yoy (of which was also partially attributable to a rise in restructured and rescheduled (R&R) loans). Key sectors that remain vulnerable include manufacturing, mining and quarrying, construction and transport, storage and communication. Nevertheless, should the industry asset quality ratios continue to deteriorate in the coming months, it could be a cause for concern.

Source: Affin Hwang Research - 1 Dec 2016