Malaysia Banking Turning more positive

Loans growth to pick up in 2H09. Loans growth in Jun 09 slowed down to 8.3% yoy from 8.9% in May due to a contraction in business loans. Business loans make up about 45% of total banking loans. A shrink in credit extended to the manufacturing and commercial sectors will continue to put pressure on loans growth. However, loans growth momentum is expected to pick up in 2H09 due to the strong recovery in loan applications and approvals since March.

Mortgage approvals at new high. After six months of decline, approvals for mortgages start moving up since Mar 09 and have hit a new high of RM7.1b (+14% mom and 34% yoy) in June. This is attributable to the recent pick-up in new launches after developers have been holding back since 2Q08. This will translate into stronger loans growth in 2010.

Proactive measures to mitigate deterioration in asset quality. Nonperforming loans (NPL) were down by RM423m qoq due to a drop in household NPLs. After two consecutive quarters of uptick, mortgage NPL eased by RM258m qoq in 2Q09. We are unlikely to see a sudden surge in NPL as previously expected because BNM and banks have been active in restructuring stress loans to reduce the monthly repayments. BNM is also reactivating the Corporate Debt Restructuring Committee (CDRC) for the resolution of distressed debts of large corporations.

Capital still strong. Capitalisation for the sector remained healthy as evidenced by both the risk weighted capital ratio and core capital ratio of 14% and 12.3% respectively. In June, aggregate capital base had increased 1% as a result of capital management exercises by several institutions. The net non-performing loans ratio remained stable at 2.2% while the aggregate loan loss coverage ratio also stayed high at 89.5%.

We are reviewing our UNDERWEIGHT weighting on the banking sector. We are now turning more positive as earning risks are declining as domestic economic activities start to pick up on the back of more aggressive government spending to boost business and consumer confidence. We also take into consideration significantly improved liquidity with the launches of Amanah Saham funds (the extremely well received RM3.33b launch and last week, the RM10m 1Malaysia Fund).