June’s loan growth continues its upwards trajectory as loan demand surges

KOTA KINABALU: The banking system’s June loans growth continued on with its upwards trajectory with a +5.0 per cent year over year (y-o-y) increase to RM1.63 trillion as June’s loan demand surged by 13.3 per cent y-o-y to RM73.2 billion.

According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), the surge and recovery of loans demand in June was due to the Zero rating of the GST starting in the same month which spurred personal consumption.

Adding to that, the research arm of Affin Hwang Investment Bank Bhd (AffinHwang Capital) also highlighted that the rebound has also been driving by improving economic indicators, a robust labour market as unemployment rates stayed steady at 3.3 per cent in April 2018, and relatively stronger commodity prices which saw improvement as the industry’s supply-demand dynamics continued to improve.

Demand for the purchase of passenger vehicles surged the most with a 43.5 per cent y-o-y increase to RM8.71 billion, and this was followed by loans for personal used and credit cards which expanded at 6.7 per cent y-o-y to RM71.8 billion and 2.8 per cent y-o-y to RM37.2 billion respectively.

Business loans growth was also up at 0.7 per cent m-o-m and +3.0 per cent y-o-y as business activity picked up post-GE14 with strong m-o-m growth in the manufacturing, wholesale/retail, business services and manufacturing sectors.

“These are key business sectors which account for 28 per cent of system loans and we believe that there could be a need for businesses to invest further in capacity expansion due to the increase of capacity utilization from 77.5 per cent in 2016 to 82.6 per cent in 2017 as measured by the MIER,” said AffinHwang Capital.

While it is favourable news that loans demand and approvals have rebounded, the banking system’s level of non-performing loans also increased on year to date basis by 6.7 per cent as at June 2018.

Despite this, AffinHwang Capital believed this was driven primarily by the commercial property and residential property segments as banks switched to the adoption of MFRS 9 which is based on a stringent expected loss methodology.

“System GIL ratio as a result, had increased to 1. 59 per cent in June 2018 from Dec 2017’s level of 1.54 per cent,” said the research arm.

Besides loans, the banking system also saw a higher pace of growth in deposits at 5.0 per cent y-o-y to RM1.8 trillion. However MIDF Research noted that this is the second month which saw slower current account savings account (CASA) growth which could indicate increasing competition for deposits in preparation of the Net Stable Funding Ratio (NSFR) requirement.

Recall that BNM announced back in 2017 that the NSFR which is a liquidity standard that requires banking institutions to maintain a stable funding profile in relation to their composition of their assets and off-balance sheet activities will be implemented by Jan 2019.

Looking forward, MIDF Research is expecting loans demand to continue providing a steady pipeline for loans growth to continue in the second half of the year and maintain their loans growth target of 5.5 per cent y-o-y for this year.

“As mentioned, we believe that the zero rating of GST may potentially provide a boost to loans growth.

“In addition, the stable employment environment will ensure loans demand to continue. With clearer direction from the Government expected later, will provide an impetus for loans disbursement from approved loans in the business segment which may provide loans growth with another driver for this year,” they opined.

The research arm maintained it ‘positive’ stance on the sector with their top picks being Maybank, CIMB and Public ban k with target prices of RM11.40, RM7.85 and RM27.30 respectively.