11. Improved sentiment seen for major banks

PETALING JAYA: The strong loans growth in December, bolstered by retail and business loans as well as disbursements, should lead to robust near-term earnings and better sentiment for major domestic banks.
Bank Negara monthly statistics reported that loans growth for the industry hit 13.6% last month, boosted by 1.5% month-on-month expansion, surpassing the RM1 trillion mark.
Several research houses said this figure was on par or ahead of their projections, depicting resilience in the local banking sector despite global uncertainties. Hwang DBS Vickers Research has projected a 13.6% growth while Hong Leong Investment Bank (HLIB) expected 12%.
The firm growth figure was largely attibutable to the 12% expansion in retail loans, 15% improvement in business loans last year and loan disbursement, which climbed 18% month-on-month, indicating vibrant lending activities.
Alliance Research banking sector analyst Cheah King Yoong said the strong loans growth in December was definitely out of expectations in many industries.
“The major loan drivers for December are business-related and hire-purchase loans (and) I suspect Maybank and Hong Leong Bank to be the major beneficiaries,” he said.
He added that lending activities were slower month-on-month due to the long holidays and seasonal year-end slowdown, “but loan disbursement is higher due to hire-purchase and business loans pick-up”.
“However, mortgage loans did not have a good take-up, (thus) I expect an 11% loans growth for 2012 to fill up the vacuum left from the moderation in mortgage loans,” Cheah said.
In addition to the firm loans growth, Cheah noted that asset quality had improved. “Many analysts have expected small loans to default but we did not see that happening. The market could have been too pessimistic on the banking sector this year,” he said.
Cheah added: “I expect fourth-quarter earnings for banks to surprise on the upside and foresee a round of upgrades by investment professionals on our domestic banking sector, post-earnings season.”
Alliance Research report stated that the strong loans growth and improvement in asset quality in December “reaffirmed the conviction that the underlying fundamentals of the domestic banking sector remain solid”.
“Despite the persistent global uncertainties in the second half of 2011, asset quality for banks in December improved marginally month-on-month, with impaired loans ratio lowered at 1.8% and loan loss coverage increased to 99.6%.”
It added that although impaired loans could trend higher if the economy deteriorated sharply, there were no reasons for a surge in impaired loans currently.
“The banking system remains well-capitalised, with the risk-weighted capital ratio and core capital ratio at 14.9% and 12.9% respectively, (implying that) the domestic banking system is resilient to withstand unanticipated shocks to the financial system, if any,” it reported.
Hwang DBS Vickers Research forecast loans growth for the year at 13%, driven by corporate and consumer segments, while working capital loans for Economic Transformation Programme (ETP) projects will be the wild card.
HLIB has maintained a conservative 9% growth projection, citing leading indicators, consumerism and ETP projects.
For other trends in loans, HLIB noted that loan applications and approvals were lower but still at an elevated level and the year-on-year growth was still double-digit. Approval rate remained at more than 50%.
“Loan deposit ratio decreased as deposits jumped significantly (leading to) excessive liquidity of RM297bil to support loans growth,” it said.
Hwang DBS Vickers Research predicts that the central bank will move into an easing mode and lower the overnight policy rate and cut its current 3% by 50 basis points by the end of next month to preempt downside risks to growth.

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