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Friday, April 10, 2009

Banking Sector Is Going South

• Feb 09 loan growth remains southbound. In Feb 09, industry loan growth
continued the deceleration that started in Jan 09. From a high of 12.8% in Dec 08,
loan growth dropped to 11.7% yoy in Jan 09 and 10.9% in Feb 09. The loss of
traction came mainly from a slowdown in business loan growth from 13.2% in Dec
08 to 11.8% and 9.8% in the following two months. Consumer loan growth,
however, kept going at a rate of 9.1% yoy from Sep 08 to Feb 09.

• Anaemic leading loan indicators. Leading loan indicators remained subdued in
Feb 09 – loan applications rose by only 4.8% yoy while loan approvals declined by
15.9% yoy. Although the growth in the corporate segment was strong at an
estimated 20-30%, SME loan applications and approvals slid by 17-19% while
household loan indicators inched down by 1-2%.

• Loan momentum loses steam. We continue to expect a sharp fall-off in industry
loan growth from 12.8% in 2008 to 1-2% in 2009 given (1) lethargic leading loan
indicators, (2) slower economic growth, and (3) the downshift in car sales.

• Deposit and lending rates head south. Fixed deposit (FD) rates were lowered
by 47-49bp to 2.0-2.6% following the 50bp OPR cut on 24 Feb. Banks also
reduced their BLRs by about 40bp to 5.5-5.6%, leading to a 78bp yoy drop in
average lending rate. But the lower lending yields were mostly compensated by
the FD rate cuts.

• Ample liquidity. As loan growth of 10.9% outpaced the deposit growth of 8.3%,
banks’ loan-to-deposit rate tightened to 73.6% as at end-Feb 09 from 71.2% a
year ago. The system still has plenty of excess liquidity of about RM215.1bn in
mid-Mar 09 vs. RM225bn as at end-Feb 09.

• NPL ratio still improving, for now. Banks’ 3-month net NPL ratio declined by
95bp yoy to 2.2% in Feb 09 but was stable mom. Gross NPL ratio also fell by
157bp yoy to 4.8% while the reserve coverage improved from 73.8% a year ago to
87.3%, aided by a 16.5% yoy drop in gross NPLs against a 1.4% decline in total

• Reiterate UNDERWEIGHT. The lethargic loan indicators, especially in the SME
loan segment, point to softer loan growth ahead. This, coupled with the expected
rise in gross NPL ratio to a projected 7% in 2009, will exert great pressure on
banks’ earnings. On this score, the sector remains an UNDERWEIGHT, premised
on the de-rating catalysts of (1) slower loan growth, (2) rise in credit costs, (3)
lacklustre investment banking income, (4) decline in overseas contributions, and
(5) lower dividend payment. Public Bank is still our top pick for the sector.

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