Banking - Overweight - 2 Jul 2012

kiasutrader

Publish date: Mon, 02 Jul 2012, 10:40 PM

BNM's MAY 12 statistics suggest that the local banking system remains flushed with liquidity. We believe this is a sign of optimism for the 2H2012 capital market development as the system would be able to support the lending and capital market activities with local funding. MAY 12 loan-to-deposit ratio was slightly higher at 78% with unutilised deposits of RM293.7b. This excess liquidity will be able to support ETP-related infrastructure projects and capital market activities, i.e. IPOs (IHH, Astro) and share market trading volume leading to possible better equity valuation multiples and a higher total market capitalisation. We believe that local banking groups will continue to do well in the current conducive banking system. We are maintaining our OVERWEIGHT call on the sector. We have OUTPERFORM calls on MAYBANK (TP: RM10.40), PBBANK (TP: RM15.60), RHBCAP (TP: RM9.60), CIMB (TP: RM8.50), AMMB (TP: RM6.70), AFFIN (TP: RM4.30) and BIMB (TP: RM3.60). AFG (TP: RM3.70) and HLBANK (TP: RM10.90) are rated as MARKET PERFORMs.

Loan growth remained stable. Total loans expanded 12.5% YoY to RM1,051.8b in May 2012 (representing an acceleration from the +12.1% YoY growth in April 2012). On a YTD basis, total loans grew 5.0% or 11.9% on an annualised basis, which is in line with our 11%-13% growth forecast for 2012E.

Credit card weakened further, but hire purchase saw a healthy recovery. Loans to households (which accounted for 54.7% of the total loans) grew at a steady rate in May at +11.7% YoY largely due to mortgage loans rising to another record high in May, up +19.3% YoY and a healthy recovery in hirepurchase loans growth of +6.64% YoY (March 2012: +6.47%). This is despite a significant weakening in credit card loans growth of +4.98% (April 2012: +6.16% YoY). On the other hand, business loans growth gained momentum with a rise of +13.4% YoY, driven by robust growth in manufacturing loans (+8.0% YoY).

Lending indicators strengthened in May. There was a 13.6% YoY increase in loan applications to RM76.5b. The improvements were mainly to higher applications in the real estate (RM4.4b) and financial intermediation (RM4.8b) sectors. Furthermore, loan approvals also rose 18.2% YoY.

Deposits rose +13.2% YoY. The YoY growth in total deposits was due to the +13% increase in fixed deposits and +11% growth in demand deposits. As deposit growth has continued to outpace loan growth, the LDR was stable at 78.2%, with total CASA contributing to 25% of the total deposits. As such, with the unutilised deposits of RM293.7b, there is significant excess liquidity in the system that would be able to support ETP-related infrastructure projects and capital market activities, i.e. IPOs,trading volume, valuation multiples, etc. We believe this is a sign of optimism for 2H2012 capital market development as the system would be able to support lending and capital market activities with local funding.

Margin continues to decline. Interest spreads were marginally narrower as 3M FD costs held steady at 2.97% but average lending yields continued their decline by 11bps to 4.77%. The continued 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.

Asset quality stable.Absolute impaired loans were barely changed at RM26.1b as opposed to RM26.1b in April 2012. Nevertheless, the impaired loan ratio was slightly lower at 1.60% (March 2012: 1.76%) and loan loss coverage improved slightly to 92% (March 2012: 91%).

Capital markets. Primary debt issuance was recorded at RM5.44b in MAY 12 (vis-''-vis RM2.25b in March 12). As for the equity market, its average daily trading value declined to RM1.41b in contrast to RM1.43b in the previous month. The decline in volume could partially due to Euro 2012 event.

No change in our view for now. We believe that our projected industry loan growth of 11%-13% for 2012E can be achieved, as corporate loans are likely to grow in 2H with the start of ETP infrastructure projects with internal funding. All in all, we believe that local banking groups will continue to do well in the current conducive banking system. Our top picks are Public Bank ('PBBANK') (domestic driven model offers earning visibility), 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 pick AFFIN Holding ('AFFIN') as the potential dark horse for the sector.

Source: Kenanga