Loans grew 0.6% m-o-m; 12.4% y-o-y in Aug-12 (Jul-12: 0.5% m-o-m; 12.9% y-o-y) bringing YTD-Aug loan growth to 7.6%. The business sector continues to drive growth, while retail sector growth lagged due to the softer property market and effects of the responsible lending guidelines by BNM.

Loan applications and approvals continued to moderate in Aug-12, but the softer momentum was expected. Nevertheless looking at the 6-month moving average trends for business loans applications and approvals, business loans pipelines still appears healthy. We maintain our full year 2012 loan growth assumption at 12%.
Deposits grew in tandem with loans (0.6% m-o-m; 13.5% y-o-y; YTD 5.8%) and was generally led by CASA (0.1% m-o-m; 10.8% y-o-y; YTD 4.4%) and fixed deposits (0.6% m-o-m; 9.5% y-o-y; YTD 4.6%). CASA to total deposits remained unchanged at 25%.

Interest spreads continued its downtrend y-o-y with average lending rates down 33 bps y-o-y while 3-month
FD rates unchanged at 3%, implying NIM pressure exists. The banking system remained well-capitalised with risk-weighted capital ratio and core capital ratio at 14.6% and 12.7% (Jul-12: 14.4% and 12.7%) respectively.

Our top picks are MAYBANK (TP: RM11.10) and HLBANK (TP: RM17.00). We like MAY which offers growth and dividend yields. Valuations remain attractive at 1.9x CY12 BV (sector average: 2.0x) with 6% dividend yield (based on a 70% payout). We also like HLBANK as it continues to reap post-merger synergies. The key risk to our forward earnings for banks would be timing of ETP projects and excessive pressure on NIM.

Source: HwangDBS Research - 1 Oct 2012