Alliance Research maintains Overweight on banking sector

KUALA LUMPUR: Alliance Research is maintaining its Overweight outlook on the banking sector with Hong Leong Bank its top pick for the sector and Affin Holdings for mid-cap exposure.

It said on Wednesday that despite on-month moderations in all three lending indicators for June, year-to-date annualised outstanding loans grew by 12.7%, reaffirming its optimism of the sector.

“We maintain that consensus earnings for banks in 2012 remain conservative, which provide room for positive earnings surprises and potential earnings upgrades,” it added.

Alliance Research said amid a strong rebound in May, the three lending indicators moderated in June on a month-on-month basis.

For June, loan application, loan approval and loan disbursements activities declined by -0.5%, -11.5% and -1.4% on a on-month basis to RM76.2bil (May 2012: RM76.6bil), RM37.3bil (May 2012: RM42.1bil) and RM88.4bil (May 2012: RM89.7bil), respectively.

On a year-to-date annualised basis, outstanding loans grew by 12.7% in June, an increase compared with 11.4% registered in May.

The research house said although property loans remains the key driver, where loans to purchase residential and non-residential properties constitute 46.0% of the annualised 12.7% loan growth for June, other purpose loans and working capital have been gathering pace, contributing 28.8% and 22.3% of the loan growth drivers, respectively.

“We also acknowledge that business loans have recorded a commendable annualised growth of 15.9%, ahead of household loans' annualised growth rate of 10.1%.

“This has reaffirmed our expectation that despite having a slow start in early 2012, overall domestic lending activities are picking up, with stronger growth of business loans stemming from the roll out of Entry Point Projects (EPP) under the government Economic Transformation Plan (ETP), which filled up the vacuum left by the moderation in property loans,” said the research house.

Alliance Research pointed out that despite the on-month moderation in the lending indicators, it remained optimistic about the continued vibrant domestic lending activities.

“We also expect the sluggishness and volatility seen in the first few months following the introduction of responsible lending guidelines to normalise going forward, with most banks completed their policy fine tuning to comply with the guidelines,” it added.