More optimism in September, but YTD growth remains weak

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Banking sector
Maintain neutral:
As at September 2014, the year-to-date (YTD) banking system loans growth stands at 5.9%, which translates into an annualised loan growth of 7.9%.

Though still behind our revised 2014 target of 8.5% (subsequent to our downgrade on CIMB Group Holding Bhd), loan growth rebounded at a stronger pace of 1.3% month-on-month (m-o-m) vs 0.7% m-o-m in August 2014.

Business loans underpinned the growth, as implied by a more robust loan disbursement rate of 5.7% m-o-m (in manufacturing, retail/services, transportation and construction sectors).

Overall, September 2014 loan indicators appeared to show higher optimism, with loan applications and approval rates rising by 4.1% m-o-m and +10% m-o-m respectively, driven primarily by the business segment.

That said, 9M14 loan repayments (16.6% year-on-year[y-o-y]) however, remains ahead of total loan disbursements (12.3% y-o-y), and as such, had continued to undermine the system’s loan growth (financials, manufacturing and construction being the key sectors with high repayments on a y-o-y basis).

In our view, banks with bigger exposure to the corporate segment i.e. Ambank Group (AMMB), Malayan Banking Bhd (Maybank) and CIMB Group, could be at risk of weaker-than-expected loan growth.

In our view, despite the slowing momentum in the credit market, certain banks remain outperformers (with above industry loan growth) such as Public Bank Bhd (group annualised loan growth at 10% vs. industry at 7.9%) given its minimal exposure to corporate lending (at 11% of portfolio) while simultaneously having a relatively established franchise in retail lending.

Even Maybank’s consumer financial services division continues to perform well (First half of 2014 [1H14] loans grew at an annualised rate of 10%), which is expected to cushion the slowdown in the corporate segment.

In fact, household loan growth has remained steady (with YTD growth of 7.7%, equivalent to an annualised growth of 10.3%) with no severe pullback despite Bank Negara Malaysia’s macroprudential measures vis-à-vis business loans, which has only grown by 3.5% YTD (annualised 4.7%).

The finance/insurance sector saw a sharper increase in gross impaired loans (by 39% y-o-y,74.7% m-o-m), hence causing the overall system’s impaired loans to rise by 1.3% y-o-y, implying a marginal uptick of two base points (bps) in the gross impaired loan ratio from 1.75% in August 14 to 1.77% in September 14.

We maintain our “neutral” rating on the Malaysian banking sector given a lack of re-rating catalyst in 2H14 on the back of weaker trading/investment gains potential, moderating loans growth and a tighter liquidity situation  (Sept 14 loan-to-deposit ratio stood at 86.8%).

Nonetheless, the drive for further consolidation within the sector could bring excitement and drive valuations higher for the sector. For sector exposure, we favour Alliance Financial Group (AFG) and Hong Leong Bhd (HLB), given their business model, compelling valuations and niche positioning: i) AFG (Add, RM4.79, TP: RM5.40 based on 1.87 times 2015 price-to-book value (PBV); and ii) HLB (Buy, RM14.62, TP: RM17 based on 1.8 times 2015E PBV. Maybank (Buy, RM9.70, TP: RM12 based on two times 2015E PBV) remains a solid banking group, well-capitalised and with a strong investment bank platform via Maybank-KimEng and offers an attractive FY15 dividend yield of 5.7%. — Affin Hwang Invertment Bank Bhd, Nov 3

 

This article first appeared in The Edge Financial Daily, on November 4, 2014.