We maintain our NEUTRAL  stance on the sector despite a slight uptick in Nov  2014’s  system loan growth  to +9.3% YoY (Oct  2014: +9% YoY), aided by  the  base effect. Business loans growth  momentum improved, offset  by  a  moderation  in  household  lending.  Asset  quality  was  also better MoM (down 1.5% MoM) while loan loss coverage was stable, but the average lending rate and loan approvals softened MoM.

YoY  system  loan  growth  gathered  pace  on  base  effect.  MoM  loan growth  was  slightly  lower  at  0.8%  in  Nov  2014  compared  with  +0.9% MoM  in  Oct  2014,  due  to a  drop  in  business loan  disbursements (Nov 2014: MYR63bn vs Oct 2014:  MYR71bn), cushioned by lower business loan  repayments  (Nov  2014:  MYR60bn  vs  Oct  2014:  MYR67bn).  That said,  due to  the  base effect,  YoY system loan growth  improved to 9.3% from  +9%  YoY  in Oct  2014.  Business loan  growth  continued  to  gather momentum  to  +8.2%  YoY vs  Oct  2014’s  +7.1%  YoY,  and off  the  YTD low of +5.5% YoY in Jul 2014. Meanwhile, YoY household loan growth eased to +10.2% from +10.5% YoY in Oct  2014. We are keeping our 9-10%  loan  growth  estimate  for  2014  but  expect  system  loan  growth  to moderate to 8-9% in 2015, in view of slowing household loan growth. 

Asset  quality  improved.  Absolute  gross  impaired  loans  inched  down 1.5% MoM (-5.5% YoY) while gross and net impaired loan ratios fell by 4bps and 2bps MoM to 1.71% and 1.26% respectively. System loan loss coverage was relatively flat MoM at 103.3% vs 103.8% at end-Oct 2014. 

November  loan  leading  indicators  were  a  mixed  bag,  with applications  up  6%  MoM  (flat  YoY)  but  approvals fell  6% MoM  (+11% YoY).  The  MoM  rise  in  applications  was  predominantly  due  to  the business  segment,  with  business  loan  applications  higher  by  17-19% MoM and YoY although  household applications were lower by 4% MoM and  15%  YoY.  In  terms  of  loan  approvals,  business  loan  approvals dropped  by  5%  MoM  (+41%  YoY)  while  household  loan  approvals declined  by  5-6%  MoM  and  YoY.  The  MoM  application  and  approval trends above, however, could also be a reflection of seasonality. 

System  deposits  grew  1% MoM (+7.8%  YoY).  Thus,  system loan-todeposit ratio was broadly stable MoM at 86.6%, as at end-Nov 2014.

Average lending rate for banks fell 2bps MoM to  4.67%,  off the high of 4.72% in Sep  2014. This  suggests that competitive pressure on asset yields is starting to be felt again post July’s  overnight policy rate  (OPR) hike. 

Investment  case.  We  remain  NEUTRAL  on  the  sector,  with  AMMB (AMM MK, BUY, TP: MYR7.45)  as our sole BUY call. Valuations appear inexpensive while potential M&A  news flow may provide a fillip to share price performance.  Public Bank (PBK MK, NEUTRAL, TP: MYR20.60)  is our  preferred  pick  among  the  NEUTRALs  due  to  the  group’s  ability  to deliver above-average book value growth.

Source: RHB