Not a smooth ride for banks

by **Cals** Tue 30 Jul 2013, 11:22

Not a smooth ride for banks
Business & Markets 2013
Written by CIMB Research
Tuesday, 30 July 2013 10:35

Banking sector
Maintain neutral: The investors we met during our roadshow early this week generally concurred with our view that loan growth will recover in the second half of 2013 (2H13), following the May 5 general election. But they think the squeeze on margin will continue to be a concern for top line growth.

Most of the investors we met at the roadshow do not foresee a systemic deterioration in the banks' asset quality. Nonetheless, we still expect an upward reversal in the trend for credit costs this year due to the drop in write-backs/recoveries.

Despite better loan growth prospects in 2H13, we remain neutral on banks due to concerns over margin compression and a rise in credit costs. MALAYAN BANKING BHD [] remains our top pick for the sector.

We had a combined roadshow in Kuala Lumpur for banks and small cap stocks on July 22 and 23. Most of the 45 investors, from 15 institutions, we met concurred with our expectation of a loan growth recovery in 2H13.

Although some clients are concerned about defaults in some corporate accounts, they do not expect a systemic risk for a deterioration in the banks' asset quality.

Given the improved sentiment post-election, we anticipate loan growth recovering to 11% to 12% for 2013 from 9.3% year-on-year (y-o-y) in May. This would be driven by the expected rebound in business loan momentum to 12% for 2013 from 6% y-o-y in May, partly supported by the credit demand for the government's Economic Transformation Programme projects.

For 2013, we still see a slight downside to the gross impaired loan ratio, which had been sustained at 2% in January to May 2013. We are projecting a drop in the ratio to 1.8% to 2%, mainly aided by a conducive economic climate.

We advise investors to hold on to their bank stakes given the expected recovery in 2H13 loan growth. On the flip side, banks will be negatively affected by the continuous margin compression and the upturn in credit costs this year. - CIMB Research, July 26

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This article first appeared in The Edge Financial Daily, on July 30, 2013.