Slower loan growth for banks expected in 2016 if downtrend persists

PETALING JAYA: Malaysian Investment Bank (MaybankIB) Research said it would lower its 2016 loan growth target of 6.5% for the banking sector if the present downward trend continues.
Banking sector loan growth contracted in March as both business and household segments registered slower growth of 5.2% and 6.4% year-on-year (yoy) respectively.
"Our industry loan growth forecast stands at 6.5% for 2016 (+7.9% in 2015), premised on a further slowdown in household loan growth to 6.1% (+7.7% in 2015) and non-household loan growth to 7.0% (+8.0% in 2015).
"The risk to our forecast is to the downside if current trends persist over the next few months," its analyst Desmond Ch'ng said in a report yesterday.
He maintained a "neutral" call on the sector with "buy" for Alliance Financial Group Bhd, Hong Leong Bank and Hong Leong Financial Group, and "sell" on AMMB Holdings Bhd and CIMB Group Holdings Bhd.
Meanwhile, Hong Leong Investment Bank (HLIB) noted that the leading indicators for the banking sector were mixed in March with loan applications continuing to grow, while the decline in loan approvals accelerated.
Loan application growth on a three-month moving average (3MMA) basis was 5.6% yoy end-March 2016 compared to 5.5% yoy end-Feb 2016. Loan approvals on a 3MMA basis, however, contracted for the seventh consecutive month, and by a larger quantum of -18% versus -10% in the month before.
As a result, there was a sharp drop in loan approval rates on a 3MMA basis, i.e. total loans approved during a month divided by total loans applied, to 41% in March 2016 from 46% in February 2016.
Mirroring this trend, approval rates declined further to 38.5% in March 2016 from 44.1% in February 2016, as approval rates for both business and household segments declined to 37.6% and 39.3% respectively.
Deposits declined for the first time since the Asian Financial crisis by 0.9% from a growth of 1.2% in February 2016, resulting in loan-to-deposit ratio (LDR) increasing marginally to 86.9% from 86.8% in February 2016).
HLIB's analyst Chye Wen Fei said that while liquidity in the banking sector was still ample to support economic growth, higher LDR could limit loan growth and pressure margin.
"Low average lending rate (ALR) (which is just 16.5bps above its all-time-low of 4.44%), intense competition for deposits and high LDR will continue to exert pressure on margin," Chye said.
HLIB maintained its loan growth projection of 7.5%, at 1.8 times of projected 2016 gross domestic product (GDP) growth which is slightly lower than its historical average of two times.
Among its top picks are Malaysian Banking Bhd (Maybank) and RHB Capital Bhd.
"We have a trading buy call on CIMB," Chye added.