Banks’ loan growth momentum tapering off in February
The loan growth momentum which saw a promising start of a 5.6 per cent increase year over year (y-o-y) in January has tapered off going into February as results showcased a lower 5.3 per cent increase y-o-y in February at RM1.53 billion.
This development has elicited mixed opinions among analysts for loan growths going forward with some being rather optimistic its momentum will be sustained in the coming months while others are taking a more precautious stance and expecting low to moderate growth for the year.
From a month on month (m-om) basis, loan growths were flat with only a 0.4 per cent increase in February, marking the fourth straight month of loan growth deceleration.
Despite this deceleration, the team at MIDF Amanah Investment Bank Bhd ( MIDF Research) remained optimistic that the growth momentum will continue as the last months (November 2016 – February 2017) have been consistently registering above a +5.0 per cent level.
On the other hand, the research arm of Kenanga Investment Bank Bhd found the declaration and tapering to be rather surprising and attributed it to lower loan repayments despite higher loan repayments.
“The tapering is can be attributed mostly to a slower growth of loan disbursements at 3.3 per cent yo-y in February from 3.4 per cent y-o-y in January, which occurred simultaneously with a surge in loan repayments at an increase of 7.1 per cent y-o-y from a decrease of 0.7 per cent y-o-y in the previous month,” Kenanga Research said.
The research arm went on to explain that despite the slower loan disbursements, February’s loan applications continued its m-o-m upward trend at 2.8 per cent with both business and household loan applications rebounding.
“The stronger applications in business loans were pushed by applications for working capital and purchase of non-residential property while demands for household loans were propelled by loans for passenger cars and residential property.”
These rebounds in loan applications in light of a deceleration of loan growths are indicators of stricter lending from banks as approval rates for loans have lowered especially for household loans.
“Overall, there is no change in the system approval rate which was flat at 42.6 per cent, while approvals for business loans seem to be slightly relaxing with a 4.2 ppts increase m-o-m to 45.8 per cent. Conversely, household approvals are tightening, falling by 400bps to 39.3 per cent m-o-m.”
With these tighter approval rates especially in household loans, Kenanga Research expects the momentum of the system loan growth to be moderate at best for 2017 which will cause stiff pricebased competition to uptrend in 2017 as competition for deposits intensifies for excess and longerterm funding.
“Our base case estimate for the system loan growth for 2017 is in the range of 5.0 to 5.5 per cent and is followed by ongoing headwinds such as compressing net interest margins, elevated credit costs and limited opportunities to drive earnings growth for the industry beyond our current expectation of a mid- to- high single digit growth.”
Alternatively, MIDF Research has adopted a much more optimistic view in light of the higher loan applications across the board, especially in the working capital segment as they believe it is a good proxy for overall business borrowings going forward.
“This suggests that either business conditions or business confidence are improving and as such, should provide for a steady pipeline for loans growth to continue.
“In our opinion, the banking sector rebound is to continue and we expect a much better performance in FY17, driven by higher loans growth and stable margins,” opined the research arm.
Kenanga Research maintains its ‘ neutral’ stance on the banking sector with most of the banking stocks under its coverage maintained at a ‘market Perform’ rating with the exception of Hong Leong Investment Bank Bhd (Hong Leong) at an ‘Outperform’ rating with a target price of RM14.75 and Affin Hwang Investment Bank Bhd (Affin Hwang Capital) at an ‘underperform’ rating and target price of RM2.85.