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Author: mirama   |   Latest post: Thu, 30 Aug 2018, 4:45 PM

 

Banking Sector - 1Q18 Earnings Review: Keeping pace with expectations

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Investment Highlights

  • All banks’ earnings in 1Q18 results within expectations. 1Q18 sector core earnings grew 3.4%QoQ after stripping out CIMB’s one-off gains of RM152mil from the sale of its 50.0% stake in CIMB Securities International (CSI) to China Galaxy, Hong Leong Bank’s RM68mil gain from the sale of VISA shares and AMMB’s RM146mil MSS expenses. On a QoQ basis, the improvement came from the stronger core earnings of RHB Bank, CIMB, BIMB Holdings and AMMB.
  • Loan growth remained slow with a slowdown in international loans partially offsetting the domestic loan growth, as well as due to the impact of FX translation with the strengthening of the ringgit. Aggregate sector gross loans expanded at a slower pace of 0.5%QoQ compared to 1.0%QoQ in 4Q17.
  • Overall sector's NIM expanded by 7bps QoQ to 2.36% due to the OPR hike of 25bps in Jan 2018. All banks except Hong Leong Bank recorded an improvement in NIM in the quarter due to the recent OPR hike. Hong Leong Bank was the only anomaly with a drop in NIM by 3bps QoQ in 1Q18. This was attributed to a higher funding cost with higher rates offered for FD to lock in the deposit rates before the increase in OPR in Jan 2018. We expect funding cost to increase due to lagged repricing impact of deposit rates following the OPR hike. Also, we expect a stronger competition on deposits moving closer to the implementation of NSFR.
  • Sector's CI ratio improved slightly to 47.0% based on lower operating expenses. Digitalisation initiatives and strategies of banks are expected to continue to gradually improve banks' cost base.
  • Increase in provisions but the sector's gross impaired loan (GIL) ratio continues to improve in 1Q18. The sector's GIL ratio inched down to 1.95% in 1Q18 vs. 1.98% in 4Q17. Maybank reported higher impaired loans for retail and business loans in Malaysia. The uptick in impairment of Maybank’s consumer loans was due to the adoption of MFRS 9, triggering certain accounts as impaired. Meanwhile, RHB Bank posted higher impaired loans which was contributed by the implementation of MFRS 9.
  • Day-1 impact of MFRS 9 manageable for banks. RHB reported a drop of 20bps, while Maybank, CIMB and BIMB had a decline of 39bps, 70bps and 32bps to the CET1 ratio respectively. There were no surprises as the decline was within management’s guidance. Elsewhere, Public Bank reported an enhancement to its CET1 ratio of 20bps.
  • We are now projecting the sector's calendarised core earnings growth for 2018 at 9.2% compared to 9.3% previously. For CY19, we expect the sector earnings to grow by 7.5% vs. 7.7% previously. This is due to the higher earnings base after the inclusion of BIMB Holdings following our recent initiation coverage on the stock as well as housekeeping adjustments to our earnings projection for Hong Leong Bank and ABMB. We maintain our OVERWEIGHT stance on the sector with BUY calls on RHB Bank (FV: RM6.20/share), Public Bank (FV: RM26.20/share), BIMB Holdings (FV: RM5.40/share), Alliance Bank (ABMB) (FV: RM5.00/share) and CIMB (FV: RM7.00/share).

Source: AmInvest Research - 8 Jun 2018

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