Hong Leong Investment Bank Bhd (HLIB) said positive leads are emerging for the banking sector but said it will take some time before it turns a bit more bullish on the sector, given the muted April 2019 banking statistics.

In a sector update today, HLIB analyst Chan Jit Hoong noted that there were improvements in loan applications which grew 5.7% compared to the 6% contraction in March as credit demand for business loans increased 11.8%. Household loans recorded weak growth of 0.6%.

"Similarly, loan approvals followed suit (up 5% versus 6.3% in March) underscored by more accommodative household lending," wrote Chan.

Despite the better leading indicators, he said it was another muted showing for the banking sector as loans growth continued to ease, marking the fifth consecutive month of a slowdown.

Loans growth for April waned to 4.5% year-on-year compared with 4.9% in March, as business lending slowed to 3.2%, partly offset by steady growth in the household segment of 5.2%.

The slowdown in business loans was due to quicker loan repayments (up 15.9%) versus disbursements (up 9.8%).

"Year-to-date, it ticked up only 0.5%, falling short of our 1.5% to 1.7% 4M2019 expectation. For the full year, we still expect 4.5% to 5% growth, seeing repayment rates normalising downwards in upcoming months and economic activities regaining momentum," said the analyst.

Meanwhile, deposit growth was stable at 5.5% and loan-to-deposit ratio stood at 87%, close to the highest-ever 89% recorded in February 2018. As the ratio is nearing its 10-year high, deposit competition is expected to persist, said Chan.

While the gross impaired loans ratio rose to 1.51% from 1.46% in the preceding month, asset quality remained healthy, supported by the agriculture portfolio.

The research house expects asset quality to remain relatively benign in 2019, given the higher proportion of new loans compared to the slower new impaired loans formation.

Average lending rate for the month decreased one basis point, compared to a 1 basis point rise in the three-month board fixed deposit.

Chan sees net interest margins (NIM) to remain challenging given the recent cut in the overnight policy rate (OPR) and diminishing flexibility to optimise the loan-to-deposit rate.

"Without strong visible growth catalysts and tracking slower vis-a-vis the five-year historical growth pace, we find that current valuation is fair, since it is trading at a discount to its corresponding time series mean price over book value."

"That said, Maybank (TP: RM10.50) is our preferred pick to the sector given its good dividend yield and low foreign shareholding level vs larger domestic peers. Other buy calls are RHB (TP: RM6.50), Alliance (TP: RM4.20) and BIMB (TP: RM5.20)," said Chan.