Loan growth was in line with our estimate. The full year loan growth is estimated at 11.0-13.0% for 2012. The YTD total loan achieved was at RM1.098.9b, which translated into a loan growth of 11.2% YoY, in line with our full year estimate above. However, we see slower growth in both the pace of business and consumer lending ahead in 2013.  The weaker consumer lending growth for the YTD was attributable to the property and hire purchase segments, where their loan growth dropped to +16.0% YoY (Oct 2012: +16.4%) and +6.6% YoY (Oct 2012: +7.1%) respectively. 

Meanwhile, November's annualised business loan growth dipped 121bps to 10.6% MoM (Oct 2012: +11.8%). This was caused by the deteriorating construction loan growth of 12.6% YoY (Oct 2012: +18.6%).

Weak lending numbers in November. There was a significant decline in loan applications from RM64.8b to RM53.1b, -18.0% YoY. Loan approvals dipped 3.2% YoY. We believe the effect from the tighter BNM lending guideline emerged in the month. However, the disbursements of loan remained good, rising 16.2% YoY.

Deposits hit 11.2% growth YoY. Higher fixed deposit, foreign exchange and repurchase agreement led the deposit growth higher to 11.2%. November 2012 LDR meanwhile hit 78.0%.

Margin compression.Interest spread continued to get smaller at 1.67%  from 1.78% previously, driven by the lower average lending rate of 4.65%, a decrease of 11bps MoM as the 3M FD rate remained firm at 2.98%. We see a further squeeze in the interest spread as the loan-to-deposit ratio continued to hold unchanged at 78.0%.

Net impaired asset was slightly higher MoM. November net impaired asset ratio rose marginally higher to 1.41%, +1bps (October 2012: 1.40%). We reckon this is a positive sign to the sector as the financing capability of the banks remains strong.

2013 Outlook.  Given our view that the responsible finance policy will continue to promote a healthier albeit slower household lending portfolio growth, the momentum of the system loan growth will hence likely be lower for 2013.  Our base case estimate for the system loan growth for 2013 is in the range of 9-10%, 1-2% lower than 2012. Together with the ongoing margin headwind, there are limited opportunities to drive the earnings growth for banks materially beyond our current expectation of a high single-digit to low teens growth. 

In addition, with the already mid-cycle valuation, we believe a valuation multiple expansion is also unlikely. Hence, we are increasingly looking to thematic plays within the banking sector to search for outperformers in 2013.

We are maintaining our OVERWEIGHT call on the sector. We have OUTPERFORM calls on MAYBANK (TP: RM10.40), PBBANK (TP: RM16.80), RHBCAP (TP: RM8.30), CIMB (TP: RM8.20), AMMB (TP: RM7.40), AFFIN (TP: RM4.40) and BIMB (TP: RM3.60). AFG (TP: RM4.00) and HLBANK (TP: RM15.20)  are rated on MARKET PERFORM ratings.

Source: Kenanga