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Bank Ratings Maintained Despite Slower Loans Growth
Malaysia Perspective | 22 October 2012

By Cecilia Kong

Despite a slowdown in the overall bank loans growth rate in August 2012 as compared to the same period last year, brokers believe the market has already taken this trend into account earlier on and are thus maintaining a “neutral” investment rating for the banking sector.

Brokerage Affin Investment Bank pointed out in its report that, according to the August figures released by Bank Negara, the banking industry’s overall loans growth rate grew year-on-year at 12.3%, while growing by 0.5% month-to-month.

Based on the current loan growth rate of 6.9%, “the annualised loan growth rate of the banking sector as a whole is 11.4%, which is higher than the 8% annual growth rate that we predicted.”

“However, this figure represents a dip when compared to the 13.6% growth achieved in 2011, and is based on the forecasted 7% – 8% annual growth rate in household borrowing.”

Affin Investment Bank said that the impact of which has already been taken into account in its current banking sector profit forecast. “We expect the net profit growth rate of the banking industry as a whole will slow to 3.9% in fiscal year 2012.”

Bank Negara noted in its report that several warning signs in the banking sector have emerged in August, which include a 10.5% month-on-month dip in the growth rate of new loan applications, a 7.1% month-on-month dip in loan approval rate, and a 8.4% month-on-month dip in loan disbursement.

On the other hand, deposits recorded an impressive 13.5% annual growth rate across the banking system in August, which represents a month-on-month growth of 0.6%. Over the same period, the net financing-deposit ratio was at a strong 88.8% level, while the net loan-deposit ratio was at 82.1%, numbers which indicate that banks “still have sufficient funds to meet the demands for credit in the future.”

However, the average loan disbursement rate in August is relatively flat, rising slightly by 2 basis points to 4.72% from 4.70% in July. On the other hand, the spread between the average loan disbursement rate and the base lending rate was at 181 basis points.

Thus, “the irrational pricing competition in the industry still prevails, but is expected to stabilise as profits are squeezed. We expect the industry’s profits will slide by between 10 to 15 basis points in 2012, as compared to the 28 basis points in 2011.”

The good news is, Affin Investment Bank affirmed that the asset quality of the banking system is still high, thanks to a minimal 1.5% net loan losses.
Furthermore, these August figures show that the capital adequacy ratio of the banking sector is still healthy, with the core capital ratio rising slightly to 12.75%, a modest increment from 12.66% in July.

“We maintain our original investment rating of ‘neutral’ for the banking industry, because there still exist signs of growth fatigue. Not only will profits continue to shrink in the future, the rate of loan growth is also expected to continue slowing.

Although overall lending will be supported by the rise in corporate / commercial loans, we at Affin Investment Bank feel that the growth rate of consumer loans will ease.

“We believe domestic banks will not exhibit any signs of stress (in terms of asset quality and capital adequacy ratio), as the financial system is still flushed with hot money.”

Affin Investment Bank’s preferred bank stocks are Maybank and CIMB, because “both banks are firmly established as the leaders in the domestic market, and are continuously expanding into the regional markets.”

Source: Affin Investment Bank.

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