BNM's April12 statistics continued to suggest that  the local banking system remains conducive. We are maintaining our OVERWEIGHT call on the sector. We have OUTPERFORM calls on MAYBANK (TP: RM10.40), PBBANK (TP: RM15.50), RHBCAP (TP: RM9.60), CIMB (TP: RM8.50), AMMB (TP: RM6.70), AFFIN (TP: RM4.30) and BIMB (TP: RM2.90). AFG (TP: RM3.70) and HLBANK (TP: RM10.90) are rated as  MARKET PERFORM. 

Remained stable.  Total loans expanded 12.1% YoY to RM1,030.8b in April 2012 (in contrast to the +12.2% YoY growth in March 2012). On a YTD basis, total loans grew 2.7%, or 8.1% on an annualised basis, which is still below our 11%-13% growth forecast for 2012E. Nonetheless, note that the higher loans growth rates that we have estimated also include overseas loans expansion. Without the overseas loans expansion, the domestic  loans growth is only estimated to be at the lower end of the range.

Dragged down by hire-purchase and credit card. Lending to the consumer sector, which had fueled the industry growth in 2011, was the drag factor in the YTD 2012 numbers.  Loans to households (accounted for 55.2% of the total loans) grew at a lower rate for the fourth consecutive months at +11.7% YoY largely due to slower hire-purchase loans growth of +6.47% YoY (March 2012: +7.07% YoY, 2011: +8.69%) and credit card loans of +6.16% (March 2012: +6.59% YoY) although mortgage loans rose to another record high in April, up +18.7% YoY. On the other hand, business loans grew encouragingly at 12.5% YoY, driven by robust growth in working capital loans (+10.2% YoY).

Lending indicators weakened.  There was a 16.9% YoY drop in loan applications to RM67.4b, with the decrease due mainly to slower applications in the real estate (RM3.4b) and manufacturing (RM4.1b) sectors. Furthermore, loan approvals also declined 11.4% YoY.  

Deposits rose +13.8% YoY. The YoY growth in total deposits was due to the +13% increased in fixed deposits and +14% growth in demand deposits. As deposit growth has continued to outpace loan growth, the LDR was stable at 76.7%, with total CASA contributing 25% of the total deposits.

ALR +14bps.Interest spread improved significantly as the 3M FD costs held steady at 2.97% but average lending yields improved by 14bps to 4.88%. However, as the banking system's loan-odeposit ratio stood lower at 76.7%, this could put further pressure on banks' interest margins.

Asset quality stable.  Absolute impaired loans were barely changed at RM26.1b compared with RM26.0b in March 2012. Nevertheless, the impaired loan ratio was slightly higher at 1.76% (March 2012: 1.74%) and the loan loss coverage was slightly lower at 91% (March 2012: 92%).

Capital markets.  Primary debt issuance was recorded at RM2.25b in April12 (vis-''-vis RM5.12b in March12).  As for the equity market, its average daily trading value declined to RM1.43b as opposed to RM1.69b in the previous month. 

No change in our view for now.  The recent resumption of the price war for residential mortgages (BLR minus 2.5-2.55% from BLR minus 2.4-2.45% in 2011) point to lower margins, while the introduction of the Responsible Finance guidelines could mean a softening in consumer loan growth with further NIM compression. We believe that our projected industry loan growth of 11%-13% for 2012E can be achieved with corporate loans likely to grow in 2H with the start of ETP infrastructure projects. All in all, we believe the local banking group will continue to do well in the current conducive banking system. Our top picks are Public Bank ('PBBANK') (domestic driven model offers earning visibility) and CIMB Group Holdings ('CIMB') and Malayan Banking ('MAYBANK') (ETP-optimism in banking with a bright prospect on corporate loans as well as debt securities). We find BIMB Holding Bhd ('BIMB') as the potential dark horse (with its niche in Islamic Banking) for the sector.