MIDF Research remains positive on banking sector on the back of improving net interest income from the increase in overnight policy rate and loan expansion.

The stable asset quality and expectation of higher non-interest income from the recovery of capital market with strong capital market pipeline deals also supported the sector, it said in a research note today.

The adoption of FRS 139 resulted in an increase in gross impaired loan/non-performing loan (NPL) ratio of banks, which rose 2.2 per cent in June 2010 from 2.0 per cent in the previous month, MIDF said.

The base lending rate in the banking system remained at 6.02 per cent but average lending rate increased to 5.05 per cent from 5.01 per cent in the previous month, it said.

'This was due to an increase in overnight policy rate by 50 basis points to 2.5 per cent,' the research house said.

It added that overall loan growth in June 2010 was higher at 12.5 per cent year-on-year compared to 11.7 per cent in the previous month.

MIDF Research said overall loan application in June 2010 grew at a lower annual rate of 7.0 year-on-year due to a decline in business loan applications and household loan applications.

Annual growth of loan approval for businesses in June 2010 rose to 35.6 per cent year-on-year from 5.4 per cent in rhe previous month, it said.

The household sector's loan approval was 13.8 per cent year-on-year as against 16.5 per cent in May 2010, it added. -- Bernama