Banking - A good start to 2013

January 2013’s banking system loan growth rose marginally by 88bps to +11.3% YoY, representing a total loan amount of RM1,114.5b. The stronger loan growth was mainly driven by both household and business financing. Household loan expanded by a steady rate of +11.9% YoY (vs. Dec 2012: +11.4%). This was buoyed by the auto loan growth of +7.7% (vs. Dec 12: +7.0%), despite a slightly lower growth momentum in housing loan of +15.6% (vs. Dec 2012: +15.8%) and the credit card loan growth of +1.48% (vs. Dec 2012: +1.8%). Business loan meanwhile rose 131bps to +10.5% in Jan 2013 as compared to +9.2% in the preceding month. In addition to this, the newly adopted Basel III Capital Adequacy Framework requirement core capital ratio stood at 12.1%.

A good start to 2013 banking system loan growth. The banking system loan growth rose marginally by 88bps to +11.3% in the first month of 2013, with the total loan amount rising to RM1,111.4.5b. In Jan 2013, both the household and business loans climbed higher and contributed the sector with their positive growth. On an annualised basis, household financing remained resilient as it surged from +11.4% in Dec 2012 to 11.9% in Jan 2013. This was primarily backed by the rise in hire purchase financing where it grew +7.7% in Jan 2013 from +7.0% in Dec 2012. Nevertheless, there was a slower pace in the property loan and credit card loan. Property loan dropped to a +15.6% YoY growth in Jan 2013 from a +15.8% YoY growth in Dec 2012 while credit card loan dipped to +1.48% YoY (vs. Dec 2012: +1.8%).

Business loan growth surged 10.5% (at a total loan amount of RM491.7b) in Jan 2013 as compared to the preceding month. Construction loan was the key catalyst in driving the higher business loan growth.

Construction loan was up significantly by 19.2% YoY (vs. Dec 2012: +10.6%). Manufacturing loan meanwhile decreased to 3.5% in Jan 2013 from 3.6% in Dec 2012.

Rise in loan application, approval and disbursement. Loan application accelerated to RM630.0b in 2013 from RM568.1b in 2012 (+10.9% YoY). The rise in loan applications was mainly contributed by financial, insurance and business activities. Loan approval meanwhile edged up 6.1% YoY from RM266.9b to RM283.3b. There was also a 11.7% increase in January’s loan disbursement (vs. -7.9% in Dec 2012).

Downward trend in deposit growth. Deposit growth shrank marginally to 8.1% in Jan 2013 from 8.3% in Dec 2012, showing a sliding trend since Feb 2012. There was decline in negotiable instrument and foreign-currency savings. However, better growth on demand deposit (13.0% YoY), saving deposit (+8.8%) and fixed deposit (+12.6%) remained strong. Meanwhile, the loan-to-deposit ratio dipped slightly to 78.2% in Jan 2013 from 78.7% in Dec 2012 (-5bps) suggesting liquidity remains robust in the system.

Margin has been squeezed further. The average lending rate fell to 4.7% although the 3-month deposit rate hovered at 2.98%, causing the margin spread of banks to be further compressed to 1.71%.  We expect the banking industry to remain competitive and this should exert further downward pressure on the NIM, estimated to be 10-20bps more in 2013.

Asset quality remained intact. The non-performing loan rate has eased further to 1.36% in Jan 2013 from 1.40% in the previous month with bigger loan base. The month saw marginally higher gross NPL by 1.6% MoM to RM22.5b, hence, the loan loss coverage also dropped to 99.0% in Jan 2013 (100.9% in Dec 2013). The NPL provision was still maintained at 2.0%. The quality of bank assets is expected to be better in 2013.

2013 banking industry 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 likely be lower for 2013. Our base case estimate for the system loan growth for 2013 is in the range of 9%-10%, or 1%-2% lower than 2012. Together with the ongoing interest 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 that 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.

All told, we reiterate our OVERWEIGHT call on the sector. We have OUTPERFORM calls on MAYBANK (TP: RM10.90), RHBCAP (TP: RM8.30), AMBANK (TP: RM7.40), AFFIN (TP: RM4.40) and BIMB (TP: RM3.60). AFG (TP: RM4.00), CIMB (TP: RM7.70), PBBANK (TP: RM16.80), and HLBANK (TP: RM15.20) are rated on MARKET PERFORM ratings.

Source: Kenanga