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Robust loans growth to buoy banking sector this year [02-03-2011]  
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Banks will continue to do well this year, on the back of robust loans growth and corporate deals that will benefit investment banks.

“We continue to advise investors to buy on weakness in the current volatile market with focus on banks, especially those that have been sold down recently, as we still see robust loans growth of 9.5%,” OSK Research Sdn Bhd research head Chris Eng said in the March outlook report yesterday.

ECM Libra Investment Research said in a report yesterday that loans growth in the near term was expected to remain intact as lending indicators continued to be in positive territory. Loan applications, approvals and disbursement in January this year increased by 22.2%, 17.3% and 16.4% year-on-year respectively.

“We expect loans growth to taper off due to our expectation that property sales growth may slow down in late calendar year 2011 and the imposition of loan-to-value cap,” it said. “Residential property loans, which accounted for 26% of loans growth, are already showing signs of growth moderation.”

Loans growth going forward would also be dampened by the impending hike in the statutory reserve requirement and the imposition of macro-prudential lending measures as guided by the central bank in its latest monetary policy statement, it said.

“We maintain our neutral call on the banking sector as loans growth is expected to taper off while net interest margins come under pressure moving forward,” it said.

An analyst with a foreign research house said that banks such as Malayan Banking Bhd and Public Bank Bhd, which have higher exposure in current account, savings account (CASA), stood to benefit more in a rising interest rate environment, especially if the overnight policy rate (OPR) moves up another 75 basis points by year's end.

A higher CASA ratio means a bank has access to a cheaper source of fund, as it pays out less interest on CASA and lends at a higher rate. As such interest expense would be lower compared with its interest income, resulting in higher net interest margin for the bank.

Typically, banks with high percentage of CASA to total deposits benefit from rising interest rates, as the magnitude of the hike in the interest rate of CASA is usually significantly lower than the change in OPR.

Analysts said that earnings posted by banks in the final quarter of 2010 came in within and above expectations.

“Banks such as CIMB, RHB and AMMB also received a boost in non-interest income as their fund management divisions did well last year from better equity businesses,” an analyst said.

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