We keep our NEUTRAL sector call. March’s system loan growth softened to 6.4% YoY vs 7.4 % YoY in February. The 23 % YoY drop in loan approvals suggests loan growth is poised to decelerate further. De posit growth remained weak, but with loan growth moderating, s ystem LDR was broadly stable. Finally, system impaired loans ticked up QoQ and YoY amid a notable surge in impaired loans relating to construction activities.

March’s system loan growth softened, with YoY growth declining to 6.4% (flat Mo M) compared to February’s 7.4% (+0.2% MoM). This was largely due to the business segment, where loan growth dropped to 6.5% YoY vs 8% Yo Y in February. The manufacturing, electricity, gas and water supply as well as transport, storage and communication sectors were the main drags. Meanwhile, household loan growth eased to +6.4% YoY (Feb: +7% YoY).

Loan approval pipelines suggest loan growth poised to decelerate further . System loan applications were flat YoY but loan approvals declined 23% YoY. Business loan approvals slipped 26% YoY with the decline largely broad based. Household loan approvals fell 21% YoY mainly due to lower approvals for loans for the purchase of securities and big ticket household loans such as passenger cars as well as residential mortgages. The approval figures above suggest that loan growth is poised to soften further. We forecast 2016’s loan growth to ease to 6-7% YoY vs 7.9% YoY in 2015.

System impaired loans. March’s absolute system impaired loans eased 2% Mo M (+5% Yo Y), while relative to end-2015, system impaired loans ticked up 1% QoQ. Overall asset quality for the household loans stayed relatively benign ( -1% QoQ; -6% Yo Y), but we note that asset quality for personal loans and credit cards have crept up – potential early signs of stress for the segment. As for the business segment, absolute business impaired loans rose 2% QoQ (+12% Yo Y). Notably, there was a surge in impaired loans from construction activities (+57% QoQ/62% Yo Y). Possibly, the surge could be partly due to companies involved in property development activities. System gross impaired loans ratio stood at 1.6%, stable as compared to end-2015 (Feb: 1.64%) but loan loss coverage (LLC) declined to 94% from 96% at end-4Q15 (Feb: 92.8%). We are keeping our view that the asset quality cycle has bottomed out. We continue to e xpect impaired loans to trend up ahead, given the weaker macroeconomic conditions, build-up of household leverage in recent years, low commodity prices and softer consum er spending.

System deposits stable MoM (-1% YoY). Hence, system loan-to-deposit ratio (LDR) was unchanged MoM at 88% (Dec 2015: 89%) while loan-to-fund ratio (LTF) was 82%.

Investment case. We remain NEUTRAL on the sector. Public Bank (PBK MK, NEUTRAL, TP: MYR19.40) is our preferred sector pick for its defensive qualities that we think should tide investors through a challenging year ahead. Valuations, however, appear fair currently. Our least preferred pick is AMMB (AMM MK, SELL, TP: MYR3.60). We are concerned that its NIMs have reached levels that are too low, especially amidst soft capital market conditions and a turn in the impaired loan cycle. AMMB had also said it was watching its exposure to property developers carefully. As noted from the statistics, this segment may have caused the surge in construction-related impaired loans.

Source: RHB Research - 3 May 2016