HLBank Research Highlights

Author: HLInvest   |   Latest post: Fri, 24 May 2019, 10:25 AM


Banking - Beware of Headwind Signals

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The recent GE14 surprise outcome has heightened concerns on banking mid term prospects. The uncertain economic policies and reviews of certain mega projects have put banks’ earnings and asset quality at risk. The delay in mega projects will pose a risk to banks’ loan growth target for 2018. In addition, current volatile environment is a bane for the banks NOII. Asset quality is well contained now, however we may see a gradual weakness if this situation persist. Post earnings forecast revisions and valuation parameter update, we downgrade our rating on CIMB and Maybank to HOLD (from Buy previously), and upgrade our ratings on AMMB and PBB to BUY (from Hold previously). Ratings for Affin, Alliance, BIMB, and RHB remain unchanged. We downgrade our sector rating to NEUTRAL (from Overweight previously). For exposure, our top pick is now PBB (BUY; TP: RM26.00).

Heightened uncertainties post GE14. The recent GE14 surprise outcome has heightened risk to the sector’s near to mid-term prospects. In our view, heightened uncertainties on economic policies and reviews of certain mega projects (which will likely lead to delays and/or cancellations of these projects) will likely pose higher earnings and asset quality risks, as well as weaker investment sentiment to the banking sector.

Loan growth at risk. Prior to GE14, we maintained our loan growth assumption of 5- 5.5% for the banking sector despite loan growth at less than 5% for the first 4 months of 2018, as we were hopeful that economic activities would pick up after GE14, supported by more mega projects rollouts. However, the unprecedented GE14 results have heightened risks on loan growth, as certain projects were being reviewed and this will likely put pressure on system loan growth (at least in the near term).

Challenges to NOII. While volatile market generally lends support to trading activities (see Figure 3 and 4 for trading activities equity and bond market trading activities trend), we believe higher income arising from more active trading activities will be more than negated by (i) lower MTM gains (or higher MTM losses arising from bond and equity market sell off, (ii) weaker fund raising activities as we believe corporates will hold back from new issuances given current market uncertainties, and (iii) lower retail participation given current weak equity market sentiment.

Downside to asset quality. For now we believe asset quality for household segment is well contained especially in the mortgage loan. Corporate segment may pose a downside surprise in asset quality in view of current environment especially for construction and manufacturing related loans.

Limited NIM upside. A 25 bps OPR hike (since July 2014) has resulted in banking institutions’ NIMs expanded by 2bps YoY in 1Q18. However, we believe the NIM expansion in 1Q18 is unsustainable and expect NIM to gradually normalise, as repricing of longer term deposits takes place and the absence of further rate hike for the rest of 2018. Beyond 2018, the incoming NSFR regulations in 2019 will add more uncertainties to NIM, as banks will be collecting longer dated deposits, which usually carry higher funding cost to comply with the regulations. To comply this, we believe banks will launch another round of deposit competition (although it will likely be milder compared to the previous round of deposit competition), which may in turn put pressure on funding cost and this will limit NIM upside.

Sector loan growth assumption cut to reflect heightened uncertainties. We cut our system loan growth assumption by 0.5%-pt to 4.5-5% (from 5-5.5% previously) for 2018.

Changes to earnings forecasts and TPs. We cut FY18-19 net profit forecasts for banks under our coverage (except for BIMB, which earnings forecasts are maintained, as we believe its earnings are unfazed by the headwinds), and AMMB by 2-6%, largely to reflect lower loan growth and NOII assumptions, as well as higher provisions. TPs, on the other hand, are adjusted by -2% - 10% to reflect earnings forecast revisions and latest beta (which is part of our valuation parameters).

Downgrade to NEUTRAL. We are turning cautious on the sector, given our concerns on near to mid-term prospects. Post sector rating downgrade, we drop Maybank and RHB as our sector top picks, given their exposure on Hyflux (for Maybank) and more volatility in the NOII contributions (for Maybank and RHB). For exposure, our top pick is now PBB (BUY; TP: RM26.00), supported by its high proportion of retail loans and superior asset quality which we believe investors would gravitate to during uncertain market climate.

Stock Call Changes

Public Bank (PBB) – Upgrade to BUY

PBB is our new top pick for the sector. In our view, PBB’s rich valuations are justified by its steady earning track record, alongside with its asset quality (which is head and shoulders above the industry peers). Besides, we believe PBB will be largest beneficiary from consumer sentiment recovery, given its high retail loan composition of 64%. Post adjustments to earnings forecasts and valuation parameter, we upgrade our rating on PBB to BUY (from Hold) with higher TP of RM26.00 (from RM23.70 previously). We believe investors will gravitate towards PBB during times of market uncertainty given its superior asset quality.

Maybank – Downgrade to HOLD

We downgrade Maybank to HOLD (from Buy) with a lower TP of RM10.00 (from RM11.00 previously), as we believe (i) project delays may have an impact on Maybank’s loan growth (corporate loan accounts for 36% of its total portfolio), (ii) current market uncertainties will likely impact its NOII (NOII accounted for 25% and 29% of its total operating income in 1Q18 and 2017, which is the fourth highest among its peers) and (iii) near term concern on asset quality given its exposure in Hyflux Ltd (which is seeking court protection to reorganise its business and address its debt).

CIMB – Downgrade to HOLD

We downgrade CIMB to HOLD (from Buy) with a lower TP of RM5.80 (from RM7.20 previously), as we believe (i) project delays may have an impact on CIMB’s loan growth (corporate loan accounts for 19% of its total portfolio), and (ii) current market uncertainties will likely impact its NOII (NOII accounted for 27% and 29% of its total operating income in 1Q18 and 2017, which is the third largest among its peers).

RHB – Maintain BUY

While heightened risk on domestic outlook may put risk to its loan growth at the corporate segment, this will likely be partly offset by RHB’s advantage position in SME segment (which it currently commands a market share of 9%). Nevertheless, we see risk in RHB’s NOII segment (which accounted for 30% of its total operating income in 1Q18 and 2017) given current market uncertainties. We maintain BUY rating on RHB with a lower TP of RM6.00 (from RM6.20 previously). We still see value in RHB from a P/B standpoint at 0.98x (vs. its 10-year average P/B of 1.06x).

Alliance – Maintain BUY

Alliance is making swift progress on various initiatives. Alliance One Account (AOA) and Alliance@Work exceeded the initial target, which helps its loan growth and earnings. The transformation programs are fruitful especially in strong NIM expansion. Gradual decline on CIR (due to expenses in transformation programmes) will help its earnings. Its limited exposure in the NOII space will limit the downside earnings risk. Maintain BUY, with a lower TP of RM4.80 (from RM4.90 previously).

BIMB – Maintain BUY

The only listed Islamic bank, earnings and superior ROE was contributed by Bank Islam and Syarikat Takaful Malaysia. Bank Islam’s loan growth consistently outpaced system loan growth (given its exposure in the retail segment, in particular, government staff, which have superior asset quality) while STMB’s earnings are still at growth stage given its lion share Family and General Takaful segment. Maintain BUY with unchanged TP of RM4.90.

AMMB – Upgrade to BUY

We see value in AMMB following recent share price weakness. At current share price, AMMB is trading at P/B of 0.66x, which is 2 s.d. below its average P/B of 1.19x, a level not seen since GFC in 2009. We upgrade to BUY (from Hold) with a higher TP of RM4.15 (from RM4.00 previously) purely on valuation grounds.

Source: Hong Leong Investment Bank Research - 2 Jul 2018

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