Loans grew 1.3% m-o-m or 9.1% y-o-y in June (May-13: 0.9% m-o-m; 9.3% y-o-y) taking YTD loan growth to 5.1%. Business loans continued to lead the sector’s loan growth, expanding 1.7% in June, bring YTD growth to 4.9%. Consumer loan growth remained steady, rising 0.9% m-o-m vs 0.7% a month ago (+5.3% YTD).

Overall loan applications and approvals were flat m-o-m but there was substantial increase in disbursements for construction loans (+47%) and purchase of non-residential properties (+30%) in the month. We maintain our 2013 loan growth estimates at 10%, assuming business loans will pick up in 2H to drive the growth momentum.

Deposit growth was flat in June (0.1% m-o-m; 8.1% y-o-y; 4.4% YTD). CASA growth resumed (1.2% mo- m; 10.9% y-o-y; 3.4% YTD) following flat growth in the previous two months, while fixed deposits growth slowed (0.1% m-o-m; 12.9% y-o-y; 8.7% YTD) after accelerating in the past three months.

Average lending yields fell 9bps (May-13: -8bps) and 3-month fixed deposit rate were unchanged, leading to further narrowing of loan spreads m-o-m.

Asset quality remains robust with gross NPL ratio at 1.96% (May-13: 2.0%). Capital ratios were stable with CET-1, Tier-1 CAR and total CAR at 11.7%, 12.6% and 13.8%, respectively.

Funds raised in the capital markets were generally soft. The issuance of new Private Debt Securities (PDS) in 1H13 (RM34bn) were lower than a year ago (1H12: RM65bn), largely skewed by the RM30bn raised for PLUS privatization in 1H12.

Within the sector, we like Hong Leong Bank (BUY; TP RM18.00) as a high quality defensive play. The stock has also been a laggard. RHB Capital (BUY; TP RM10.30)’s valuations are attractive with upside from improving non-interest income.

Source: HwangDBS Research - 1 Aug 2013