On a YTD basis, the total loan amount of RM1,079.5m grew 7.6% or 11.4% on an annualised basis, which is in line with our 11%-13% loan growth forecast for 2012. Despite signs that banks  have been pulling back on consumer lending since 1Q2012, loans to households (which accounted for 54.9% of the total loan) grew at a steady rate in August12 at +11.7% YoY largely driven by a healthy recovery in the hire-purchase loan growth of +7.3% YoY (vs. July12: +7.28%). However, there was a continuous weakening of the growth momentum in credit card loans of +2.39% (vs. July12: +3.14% YoY). Mortgage and business loan growth rates, on the other hand, were steady at +17.5% YoY (vs. July12: 18.0%) and +13.2% YoY (vs. July12: 14.4%), respectively.    

The rise of corporate and business loans? While the 're-balancing' of Malaysian lending portfolio will likely occur at a measured pace, we do think that this will bring some changes to the banking industry landscape in the next few years. For instance, there could be a shift from consumer growth to that of corporate and business growth. This is because regulatory intervention on consumer lending requirements has grabbed the headlines on contrast to corporate lending growth, which should not face any similar direct pressure given the continued growth of ETP-related projects. In the absence of robust growth in the consumer sub-segments i.e. mortgages, hire-purchase and credit cards, banks have been supporting the financing of ETP-related infrastructure projects ' this being reflected most recently in the higher corporate lending growth of 13.2% vs. consumer's 11.7%.

Monetary policy remains accommodative. That said, Bank Negara Malaysia (BNM) is taking a thoughtful approach to its overall lending policy in the system, preferring selective growth rather than a broad-based tightening which still promotes a healthy lending practice in the system. We expect loans growth in the consumer segment to moderate as the recent Responsible Finance rules related to down payments are still affecting demand. Nonetheless, the overall lending growth rate should still hit our target of 11-13%. This is because the current monetary policy and the underlying liquidity condition, with excess liquidity and capacity in the system (a L/D ratio of 79%), should continue to support both investment and consumption demand growth.  

Margin squeeze is a new norm? A common trend seen in the monthly statistics is the downside risk to NIM asserting itself despite the consistent loan growth in the system. Over the last eight months, we have seen greater competitions for deposit funding in the household credit segment. If this proves temporary, we see little downside risk to NIM. However,  if this trend is sustained, the higher funding costs could be a major drag on net interest income and hence EPS growth. In fact, NIM compression headwind is no stranger to Malaysian banks. The recent 2Q results have shown the consistent disappointment in this area from funding/lending competition.

Asset quality in the system remains strong. We think that ultimately lower NPLs will be mask by the strong lending quality and robust loan  growth. This has led to the NPL ratio falling 35bps in the past year to 1.48%. There is also continuing more benign outlook for credit costs.  On balance, we continue to remain optimistic on the sector outlook. We are maintaining our OVERWEIGHT call on the sector. We have OUTPERFORM calls on MAYBANK (TP: RM10.40), PBBANK (TP: RM15.60), RHBCAP (TP: RM8.30), CIMB (TP: RM8.20), AMMB (TP: RM7.40), AFFIN (TP: RM4.30) and BIMB (TP: RM3.60). AFG (TP: RM4.00) and HLBANK (TP: RM13.00) are both  rated on MARKET PERFORM calls.

Source: Kenanga