Total applications were broadly stable month-on-month (m-o-m) but absolute loan approvals accelerated to RM33.3 billion (+24.2% y-o-y) against RM28 billion (+11.2% y-o-y) in May with the pick-up mainly from the business segment (+35.6% y-o-y; +37.3% m-o-m). June's numbers suggest that demand for loans has not been dampened by BNM's two overnight policy rate (OPR) hikes in March and May. While loan growth ahead may moderate due to a higher base effect and/or a pick-up in capital market fundraising activities, the strong June numbers have prompted us to raise our 2010 loan growth projection for the banking system to 11% from +9%.

Absolute non-performing loans (NPLs) as at end-June 2010 were broadly stable m-o-m. Consequently, June system-wide three-month gross and net non-performing loan (NPL) ratios remained at 3.5% (May: 3.5%) and 2.2% (May: 2.2%) respectively, while loan loss coverage (LLC) improved slightly to 93.1% (May: 91.7%). As compared to end-March, absolute NPLs at end-June rose 5.3% with the increase largely due to the business segment, while NPLs for the household segment declined by 8.3%. This trend could potentially be due to the adoption of FRS139.

Commercial banks' average lending rate in June trended higher to 5.05% (May: 5.01%) but the spread fell to 2.3% (May: 2.33%) as the overnight interbank rate also trended higher to 2.75% (May: 2.68%), possibly in anticipation of another 25 basis points hike in the OPR.

June loan-deposit (LD) ratio increased to 81.4% (May: 80.5%). Industry capital ratios remained broadly stable m-o-m and healthy with the core capital ratio and RWCR at 12.9% (May: 13.1%) and 14.8% (May: 15%) respectively.

On the whole, June's numbers help support our positive stance on the sector, especially given that loan growth appears broad based, both the business and household segments did well. This would be further aided by the three OPR hikes that have taken place thus far, and taken together these factors would help support earnings momentum in 2H2010. Thus, we are maintaining our overweight rating on the sector. We like Maybank, CIMB, AMMB and Public Bank for an exposure to large-cap banking stocks. Affin and AFG are also rated as outperform while EONCap and HL Bank are both rated market perform. ? RHB Research Institute, Aug 2

This article appeared in The Edge Financial Daily, August 3, 2010.