Banking on hitting bottom

KUALA LUMPUR: It may be past the sink-or-swim stage, but nevertheless analysts are still cautiously treading water before declaring that the floor has been found for the country’s banking sector.

Both ECM Libra Investment Research and OSK Research are maintaining their neutral and overweight calls, respectively, on the sector on the back of rising key leading indicators, which at the very least appear to be showing a slower rate of decline.

This cautious optimism is supported by Bank Negara Malaysia (BNM) statistics for October 2009, which show lead indicators exhibiting signs of returning to healthier levels with overall loan growth of 7.5% year-on-year (y-o-y) for the month compared with 7.2% in September.

ECM Libra noted that loans growth, which had declined rapidly since December 2008 when outstanding loans for that month grew 12.8% from a year earlier, was perhaps finding its base in October after months of erratic movement.

“The improving set of numbers corresponds to the gradual recovery in economic conditions, mirrored by the recent announcement of 3Q09 GDP which registered a contraction of 1.2%, much healthier than the 1Q09 and 2Q09 contractions of 6.2% and 3.9%, respectively,” said the research house in a note last Thursday.

“We had already imputed stronger 7% to 8% loans growth from CY10, from the average 5%-6% currently,” it said.

It also said there had been pent-up demand for credit, based on the double-digit y-o-y changes in applications and approval numbers.

On the back of generally improving consumer and business sentiment, loan applications were up 38.3% y-o-y in October against 3.6% in the previous month. Loan approvals in October also rose 25.4% y-o-y versus 1.5% in September, which OSK Research said was indicative of banks’ lower risk aversion.

“Apart from higher loan approvals from the SMEs and household segment, loan approvals for business turned positive with a growth of 12.1% versus a contraction of 11.2% in September 2009,” OSK Research said in a note last Thursday.

It added that it had maintained its industry loan growth forecast of 7.5% for 2009 and 8.5% for 2010.

OSK Research said there were “no signs of deterioration” in asset quality with net non-performing loans (NPLs) hovering at the 2.1% level while aggregate loan loss coverage ratio was above 90%.

Average lending rates (ALR), another leading indicator for the banking system, were also relatively stable at 4.9% while average base lending rates (BLR) remained unchanged at 5.51%.

“The average quoted fixed deposit rates for tenures between one and 12 months were still within the range of 2% and 2.5%,” OSK Research added.

Meanwhile, total deposits in the banking system in October showed a marginal decline of RM600 million compared with September 2009, due to the withdrawal of maturing negotiable instruments of deposit (NID) put in place by banking institutions.

The financial system saw an increase in business enterprise deposits by RM8.9 billion which primarily took the shape of Islamic banking instruments and other deposits.

Top picks among the research houses include MALAYAN BANKING BHD [], CIMB Group Holdings Bhd, PUBLIC BANK BHD [], AMMB HOLDINGS BHD [] and EON CAPITAL BHD [].

HwangDBS Vickers Research liked CIMB “for capital markets’ play and exposure to the Indonesian banking sector” and Public Bank “for resilience and dividends”. It also recommended HONG LEONG BANK BHD [] for its expansion in the region and potential for growth in China, and EONCap for a small-cap bank play.

Meanwhile, Nomura Singapore Research in its Asean Bank Check for last week, recommended a buy on Maybank and a neutral on Public Bank, while adding that AMMB showed promise of an upside despite a run-up in the stock.

Maintaining a buy on AMMB with a raised target price of RM6.10, Nomura said the lender was currently trading just above its mid-cycle price-to-book value ratio of 1.5 times.