Banking sector
Maintain “neutral”. The banking system loan growth as at August 2014 was up 4.6% year to date, remains behind our 2014 target of 9% due to higher repayments. However, our channel checks indicate that certain sectors may see a pickup in the second half of 2014 (2H14), with August 2014 loan applications, approvals and disbursements rebounding month-on-month (m-o-m) driven mainly by the business segment.

Our top stock picks include Hong Leong Bank Bhd, Alliance Financial Group Bhd (AFG) and Malayan Banking Bhd (Maybank).

As the pace of the first eight months of 2014 (8M14) loan repayments was up 16.7% year-on-year (y-o-y) which was ahead of total loan disbursements (+12.4% yoy), this has continued to weigh on system loan expansion. Higher repayments were largely related to household, manufacturing, retail trade and finance or insurance sectors.

In our view, this trend was evident in banks with bigger exposure to the corporate segment such as AMMB Holdings Bhd, Maybank and CIMB Group, whose second quarter of 2014 (2Q14) loan growth was sluggish at -1.9%, and up 2.3% and 0.2% quarter-on-quarter respectively.

A 1% decline in loan growth will negatively impact sector earnings by about 1.1%, implying a potential 2.3% downside risk to our sector net profit forecast. As at August 2014, household loans continued to maintain a steady growth rate of 11% y-o-y compared with 11.1% y-o-y in July 2014 despite the macroprudential measures.

This segment continues to outpace business loans, which grew by a moderate 6.7% y-o-y versus 6.8% y-o-y in July 2014.

In August 2014, we saw an increase of 4.9% m-o-m increase in loan applications, underpinned primarily by a 9.8% m-o-m expansion in new business loan applications versus households, up 0.4% m-o-m.

Loan approvals increased m-o-m as well at 3.9% against 0.6% m-o-m in July 2014, with a more marked increase in business loans. Driven by a stronger disbursement trend m-o-m, rising by 6.5%, the system outstanding loan in August 2014 grew by 0.7% m-o-m versus a flattish m-o-m growth in July 2014.

On a y-o-y basis, system loan outstanding grew by 8.6%. Based on channel checks, some key sectors are expected to see a potential increase in the drawdown of corporate loans in 2H14 such as oil & gas, agriculture and infrastructure.

Though the transportation (8.2% of total impaired loans) and agriculture (1.5% of total) sectors saw increases in gross impaired loans by 12.3% y-o-y and 21% y-o-y respectively, we believe that the impact of the increase is still minimal to the overall impaired loans in the banking system down 5.2% y-o-y. The system gross impaired loan ratio, meanwhile, eased to 1.75% in August 2014 from 1.76% in July 2014.

We maintain “neutral” on the Malaysian banking sector given a lack of rerating catalyst in 2H14 on the back of weaker trading, investment gains potential, moderating loans growth, and a tighter liquidity situation.

Nonetheless, the drive for further consolidation within the sector could bring excitement and drive valuations higher for the sector. For sector exposure, we favour AFG and Hong Leong, given their business models, compelling valuations and niche positioning. Maybank remains a solid banking group, well-capitalised and with a strong investment bank platform via Maybank-KimEng and offer an attractive financial year 2015 dividend yield of 5.6%. — Affin Hwang Capital, Oct 1
 

This article first appeared in The Edge Financial Daily, on October 2, 2014.