Banking - Business Loans In The Limelight

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Publish date: Wed, 01 Aug 2012, 02:06 PM

Business Loans In The Limelight

While we observed disappointing growth trends in loans disbursements for properties and personal loans for credit cards, the industry loans growth for June is supported by business loans in anticipation of ETP-related initiatives. Furthermore, a strengthened asset quality, healthy impaired loans ratios, increased provisions and resilient liquidity levels in the industry will help spur further support for financing needs to the ETP projects. Our top pick remains CIMB (BUY, FV: RM8.53 - 2.3x P/BV, 16.7% ROE) and Maybank (BUY, FV: RM9.85 - 2.03x FY12 P/BV, 15.2% ROE).

Loan growth improves further. June 2012 loans growth inched up 10bps to 12.6% y-o-y as compared to 12.5% y-o-y growth in May2012. On an annualized basis, 1H2012 loans growth of 12.7% stands resilient, underpinned by loans growth for non-residential properties (+22.6%), residential properties (+13.6%), purchase of securities (+16.9%) and lending to the construction sector (+15.5%).

Loan application and loan approvals for properties sector weakened. Industry loan approvals contracted 3.0% y-o-y in June compared to +18.2% in May. Both loan application and loans approval for residential and non residential properties exhibited negative growths for the first time this year. Loan application for residential registered y-o-y contraction of 12.2% while loan approvals declined 17.6%. Loan application for non residential registered 6.0% y-o-y contraction while loans approvals declined 7.4%.

Business loans picking up, driven by ETP. Approvals for business loans have been largely supported by construction and working capital, which saw a m-o-m increase of +256.5% and +59.9% respectively in June, a drastic turn as both segments exhibited y-o-y contractions in May. Approval rates for construction and working capital doubled those registered in the previous month at 42.2% and 60.1% respectively. We believe the application of bridging loans and bond issuances are already gaining on the ETP traction, such as the recent RM8.0bn financing agreement by DanaInfra Nasional to finance the first phase of the MRT project.

Pockets of buying opportunities ' focus on ETP beneficiaries. We are of the view that the overall sector performance may continue to lag, especially if net interest margin pressure continues to persist coupled with a further moderation in consumer loans growth. As such, we continue to maintain our selective buying strategy on banks that will benefit directly from the eventual financing and capital market related growth from further ETP growth traction ' ie: CIMB, Maybank and RHB Cap.

ANKING OPERATING STATISTICS ' JUNE 2012

Loan growth improves 10bps to 12.6% in June 2012. June 2012 loans growth improved 10bps to 12.6% y-o-y as compared to 12.5% y-o-y growth in May 2012. On an annualized basis, 1H2012 annualised loans growth of 12.7% came in better than expected, underpinned by loans growth for non-residential properties (+22.6%), residential properties (+13.6%), purchase of securities (+16.9%) and lending to the construction sector (+15.5%). However, the 1H12 annualised loans growth reflects a moderation compared with 1H2011 annualised loans growth of 14.5%.

Hire-purchase up 6.1% y-o-y. Loan growth for the purchase of passenger cars grew 6.1% y-o-y in June compared to 5.6% in May and 5.1% in April. In the most recent note by our automotive analyst, TIV bounced back in May, boosted by sales of Proton's new Preve and normalization in the processing of loans, which revved up sales of entry-level cars coupled with the low base effect as vehicle sales bottomed up last year during the same period due to supply chain disruptions caused by Japan's earthquake and Thailand's floods.

Credit card and personal use continue to weaken since Dec 2011. Loan growth for credit cards (June: +4.6% y-o-y vs May: +5.0% y-o-y) and personal use (June: +13.3% vs May: +14.6%) witnessed slower growth compared to the previous month. The declining trend for credit cards extended from 12.5% in March 2011 to 4.6% in June 2012 since BNM issued the new credit card guidelines last year. To recap, BNM revised the minimum income requirement to apply for a credit card to RM24,000 per annum from RM18,000 per annum previously and applicants or cardholders who earn RM36,000 per annum or less would be able to hold only credit cards from a maximum of two issuers. This is in tandem with BNM's effort to promote prudent financial management among credit card users. Consequently, we continue to see losing interests in credit card loan applications which exhibited a flat 0.1% m-o-m growth and a contraction 16.8% y-o-y in June. We expect loan growth for credit cards to remain uninterestingly flattish for the rest of the year as there are no catalysts that should propel the segment in our view.

Mortgage loans and approval starting to exhibit diverging patterns. Loan growth for mortgages grew 13.6% y-o-y in June, on par with Apr-May2012 levels, though slightly less than the peak of 13.9% y-o-y growth levels seen in Mar. However, the issues of concern instead comes in the form of mortgage approvals and applications which have both approached double-digit negative growths this year, with mortgage approval and application trend declining17.6% and 12.2% y-o-y respectively.

MIXED REVIEW ON LEADING LOANS INDICATORS

Loan application growth mixed. Loan applications grew at slightly less than a double-digit pace (June: +9.7% vsMay: +15.1%), underpinned by stronger loan applications for business segment which grew sharper (June: +19.0% vs May: +13.7%), however was affected by the household segment that experienced a slightly retreat y-o-y (June: -0.4%vs May: +16.5%). The change in pattern for household segmentwas largely due to the shrinkage of loan applications for personal use (June: -16.2% vsMay: +10.6%),and credit card (June: -16.8% vsMay: -3.2%), despite the robust growth levels of loans application for securities (June: +84.2% vs May: +150.5%), and transport vehicles (June +18.0% vs May: +18.5%). Loan applications for the business segment on the other hand was supported by encouraging loan applications for construction (June: +12.1% vsMay: -3.2%), working capital (June: +15.9% vsMay: +21.5%) and other purposes (June: +67.8% vs May: +20.2%).

Purchase of properties losing steam. Loans application for the purchase of residential properties shrunk in June, paring 12.2% y-o-y in June 2012 (vs May 2012 : +2.5%, full year 2011's growth of 12.1% and full year 2010's growth of 27.6%). On a Dec-June 2012 comparison, residential property application loans annualised growth of 16.9% pales in comparison with 6M 2011's 74.8% growth and 6M 2010's 31.5% growth. On the other hand, loan application for purchase of non-residential properties seemed to fare slightly better albeit still in a negative y-o-y contraction since Apr this year (June: -6.0% vs May: -1.7%). The last time residential and non-residential properties both experience negative y-o-y contractions in terms of loan applications was at January this year. The overall decline in loans application for properties combined is at 10.0% y-o-y. As total residential and non-residential properties contribute to 38.2% of total industry loans base, further moderation in properties loans application and approval is likely to impact overall loans growth despite a pickup in other loans segment. With many potential residential properties purchasers adopting a wait-and-see attitude prior to the General Elections we expect loans application for residential properties top remain subdued in the months ahead.

Purchase of transport vehicles turned out to be the only performing household loan component. Loan application for purchase for transportation vehicles continued to register double-digit 18.0% y-o-y growth in June vs 18.0% y-o-y growth in May, however it experienced a slight m-o-m decline of 3.5%. We believe this trend should continue in the second half of 2012 as automotive sales are expected to pick up from the aftermath of 2011's Thai floods, aggressive promotions of new car models and the market adjusting to the new BNM lending guidelines.

Purchase of securities supported by high-profile equity deals. The sustained double-digit y-o-y growth for the loan application for purchase of securities could be attributed to the continued support of significantly large equity deals that surfaced this year, namely the initial public listings of Felda Global Ventures and Gas Malaysia.

Strong business loans application. Loan applications for business loans are strongly supported by positive double-digit growths exhibited for construction, working capital and other purposes. Amongst the business loan components, loan applications for other purposes exhibited the strongest y-o-y growth at 67.8%, while loan applications for construction exhibited the strongest m-o-m growth at 129.6%. These can be attributed to a boost in ETP-related borrowings in the form of application for bridging loans and bond issuance to support the upcoming project implementations.

LOANS APPROVAL DROPPED

Loan approval growth declined due to properties and credit cards. Loan approvals fell by 3.0% y-o-y in June compared to a +18.2% rise in May. Total absolute loans approval for the month of June'12 is still relatively high at RM37.3bn vs the average monthly absolute loans approval quantum of RM32.7bn for Jan-May'12 and RM31.9bn in 2011. The main drawbacks for loan approval ofJune'12 were the sharp drop in loan approvals for residential properties (June: -17.6% vs May: +3.9%), non residential properties (June: -7.4% vs May: -5.8%), personal use (June: -16.0% vs May: +5.4%), and credit cards (June: -13.7% vs May: -20.1%).

Loan approvals for properties are in contractions since April. Similar to loan applications, loan approvals pertaining to residential and non-residential properties have both registered contraction figures of 17.6% y-o-y and 7.4% y-o-y respectively in June. The last time loan approvals for both residential and non residential properties suffered y-o-y contractions was in the month of April. Likewise, loan approvals growth for total residential and non residential properties combined have been either flat or in contraction for 2Q12, registering 14.2% y-o-y decline in June, 0.4% y-o-y growth in May and 13.0% y-o-y decline in April.

Business loans approval supported by regained interest in construction and working capital.  Loan approval for business loans have been largely supported by construction and working capital which saw a m-o-m increase of +256.5% and +59.9% respectively in June. This is encouraging as loan approval for construction and working capital for the month of May were registered at declines of 71.0% and 19.4 respectively. This reaffirms our take of the full support garnered from the banks to finance some of the ETP infrastructure initiatives such as the early phases of the MRT projects.

Approval rates still in a declining trend.  Industry loan approval rates had fallen slightly to 48.9% in June 2012 vs 55.0% in May 2012. On a wider time frame, we note that industry approval rates for loans, defined as loans approved over loans applied, have been on a slow decline for the past few years from 63.3% in end-2009 to 55.6% in end-2011 and 43.3%inFeb 2012, which Feb was by far the month with the lowest approval rate seen in 2012. This is driven by ongoing government regulations to cool down borrowing applications to key household sectors and imposition of stricter approval requirements, with the most recent responsible lending guidelines impacted approvals for properties and credit cards.

Household loans approval rates largely determined by residential and vehicles.  Household loan approval rates increased to 53.8% in June 2012 vs 47.4% in May 2012. However the average household loan approval rate for 1H2012 of 49.8% is below the average approval rates of 53.8% and 54.5% for FY2011 and FY2010 respectively. While approval rates across all types of loans are general on a decline, loans approved for credit cards and securities were the notable segments that translate to approval rates above 60%. We also observed that the current approval rates for credit cards (63.0%) and securities (68.4%) are within the average approval rates registered in 2011.
A wide swing seen in loan approval rates among some business loan segments.  As of June 2012, the approval rate for business loans in general was registered at 45.2% vs 62.8% in May 2012. This drastic change in loan approval rate is due to the wide upswing in the loan approval for other purposes, which was registered at merely RM2.1bn in June vs a whooping RM11.9bn in May. Due to this wide upswing, the loan approval rates for other purposes appeared drastically change from 138.6% in May to 19.2% in June. We think this upswing is in line with our take in a sense that during May 2012 a larger chunk of the loans were approved in line with the growth of SMEs and corporate businesses which stand to gain from the ETP growth traction. Even for the month of June, loan approvals for construction and working capital are both picking up where loans approved for other purposes have left off, registering double the approval rates at 42.2% and 60.1% respectively.

LOAN DISBURSEMENT

Loan disbursement remained robust despite falling slightly from May. Loan disbursement grew 18.9% y-o-y in June compared to 35.4% y-o-y in May, despite suffering a 1.4% m-o-m contraction from May figures. This is mainly supported by loan disbursement for the business segment (June: +23.3% vs May: +56.0%). Loan disbursement for the business segment was bolstered by loan disbursement for working capital (June: +32.4% vs May: +56.5%), non residential properties (June: +23.7% vs May: +12.5%) and construction (June: +1.8% vs May: -27.6%). Also, loan disbursement for the household segment rose y-o-y (June: +9.2% vs May: -3.8%), largely supported by loan disbursement to securities (June: +114.3% vs May: -36.4%), and passenger vehicles (June: +30.0% vs May: +26.1%).

LIQUIDITY

Deposits grew 12.6% y-o-y. Total system deposits grew +12.6% y-o-y in June compared to +13.1% y-o-y in May. The only segment with a dip was lower deposits from the federal government (June: -32.2% vs May: -13.8%), however this is rather insignificant as it contributes to merely 1.2% of total deposits. Nonetheless, deposits from most of the other holders posted positive growth on a y-o-y basis ' state government (June: +10.8% vs May: +15.5%), statutory authorities (June: +33.7% vs May: +14.0%), financial institutions (June: +3.2% vs May: +3.2%),business enterprises (June: +15.5% vs May: +17.4%) and individuals (June: +13.3% vs May: +13.6%).

Deposit growth converges with loans growth. We note that for the first time this year, deposit growth has now converged with loans growth at 12.6% each. Prior to this, deposit growth had been outpacing loans growth from a year ago till now. With a the slower m-o-m growth in deposits vis-''-vis loan growth, the banking system's loan to deposit ratio (LDR) inched up to 82.1% in June compared to 81.5% in May.

ASSET QUALITY

Asset quality strengthened. Total gross impaired loans for the month of June 2012 improved 7.1% m-o-m and 13.4% y-o-y, while the loan loss coverage increased to a new high at 98.9% from Feb 2012's peak of 97.5%. Net impaired loans ratio improved 11bps to 1.53% as at end June 2012. Overall asset quality for most lending segment continues to reflect a m-o-m improvement apart from purchase of securities and credit cards which were at very minor m-o-m deterioration at 0.9% and 0.1% respectively. Residential properties, non-residential properties and working capital registered 13.6%, 16.2% and 19.8% y-o-y improvement in gross impaired loans. On a m-o-m comparison, business loans for other purposes reported the strongest improvement in gross impaired loans movement (21.7% m-o-m) and with personal loans being the only key lending segment reporting a m-o-m improvement in gross impaired loans 4.7% m-o-m).

Loans impairment from purchase of securities and hire purchase rises.  Gross impaired loans for purchase of securities and hire purchase registered a y-o-y increase of 87.0% and 5.8% respectively. The exceptionally strong growth in lending for purchase of securities coupled with the increase market volatility may have contributed to the spike. However total industry lending exposure to purchase of securities remains relatively well contained at 4.7% of total industry loans base despite the strong growth of late.

Deposit rates fallen slightly. Average lending rate (ALR) for commercial banks remained at 5.60% from the preceding month. The slight drop is a persistent trend owing to the continuous pressure on mortgage Lending yields which are now hovering at BLR-2.45%. The 1-month fix deposit rates dipped 1bps from 2.91% in May to 2.90% in June while the 3-month fixed deposit rates increased 2bps to2.99%.

VALUATION AND RECOMMENDATION: MAINTAIN NEUTRAL

While we do not expect a major melt down in asset quality or liquidity constraints, we think that the earnings growth momentum may have slowed significantly, as reflected in 1Q12's uninspiring sequential loans growth and net interest income trend, which are at a 4-year historical low. Aggregate pre-provision operating profit dropped 2.4% q-o-q despite a 14.4% q-o-q spike in non-interest income, which was largely driven by unsustainable and lumpy trading and investment gains. On the back of slower trading gains expected in 2Q12 coupled with continued pressure on NIMs, we believe that the overall profitability trend will meet expectations on a best-case scenario. The bright spot that could help mitigate the downside risk on net interest income growth lies in the continued improvement in provisions, underpinned by lower collective assessments and relatively benign system-wide NPLs. Our top pick remains CIMB (BUY, FV:RM8.53 - 2.3x P/BV, 16.7% ROE) and Maybank (BUY, FV: RM9.85 - 2.03x FY12 P/BV, 15.2% ROE).

RHB Capital remains by far the most undemanding relative to ROEs. Assuming that there is no major deterioration in book value, a close look at the individual banks' PBV and their respective FY12 ROE forecasts indicate that RHB Capital is the most undervalued in terms of its current 1.33x FY12 PBV relative to its sustainable ROEs of 13.6%.

Source: OSK