KUALA LUMPUR, Oct 3 (Bernama) -- Hong Leong Investment Bank (HLIB) has maintained a loans growth projection of 12 per cent for this year despite year-to-date loans growth ahead of expectations.

This is to factor a higher base effect as well as the heightened risk of a global economic downturn, it said in a research note today.

The loans growth for the industry in August 2011 accelerated to 13.4 per cent versus 12.9 per cent in July.

HLIB said the recent heightened risk of global recession and investors risk aversion could adversely affect the banking system's earnings prospects, especially on asset quality, capital market related income and general slowdown in loans growth and transactional income.

"However, we remain vigilant and believe that the sector is able to weather the potential storm ahead, given the sector is the best proxy to domestic economic growth," it said.

HLIB said continued consumption will indirectly boost demand for hire purchase, mortgage, personal loans and credit cards.

"Coupled with funding requirements from Economic Transformation Programme (ETP) projects as well as those who secured contracts from Petronas, loans growth is expected to be sustained at around 12 per cent in 2011," it added.

HLIB said both domestic consumption and economic activities will also generate non-interest income for banks, either in corporate finance related works or transactional fees.

It said another supporting factor is that companies are now in a much better financial position vis-a-vis the pre-Asian financial crisis, and their contribution to the total system loans, has declined from about 70 per cent to about half.

HLIB has maintained a overweight call on the banking industry.

Meanwhile, ECM Libra Investment Research said the current selldown on banking stocks does not alter its neutral stance on the banking sector, given that some banks may be experiencing peaking return on equity.

Therefore, we believe that the overall sector valuation remains unattractive despite the recent market rout, it added.