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HLBank Research Highlights

Author: HLInvest   |   Latest post: Wed, 22 Jan 2020, 9:02 AM

 

Banking - 3Q19 Report Card: Plagued by High Provisions

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Nothing to cheer about as 3Q19 was a muted reporting period, where sector net profit was flattish QoQ and YoY. Essentially, total income growth was erased by the spike in loan loss provision. Overall, there were no real surprises during the quarter as 6 out of 8 banks under our coverage, delivered largely in line results while 2 missed expectations. Although the growth outlook for banks is modest (3-year CAGR of 2.3%), we are consoled by cheap valuations (sector trading at - 2SD to 5-year mean P/B). Maintain NEUTRAL and we advocate selective stock picking. Our preferred pick is Maybank (TP: RM9.50). Other BUYs are RHB (TP: RM6.45), Alliance (TP: RM3.30), and BIMB (TP: RM5.00).

3Q19 results round-up. Ex-Affin and Alliance (missed estimates), the other 6 banks under our coverage reported numbers that were in line; the disappointment at Affin was due to falling loans growth, lower JV & associate income, and higher effective tax rate, while Alliance booked in surprisingly high bad loans provision.

QoQ. 3Q19 sector net profit was flat despite total income grew 6% as net credit cost shot up 24bp and loan loss provision doubled. At the top, non-interest income (NOII) rose 6% given good trading results (falling yield climate) and net interest margin (NIM) nudged up 3bp on the back of downward deposit repricing. As for opex, banks are still managing costs tightly (ex-CIMB who incurred one-off high transformational expense). Generally, these were the trends seen but some like Affin and AMMB saw profound earnings dragged by higher bad loan allowances. Besides, Alliance did not have to content with impairment on financial assets while RHB’s top-line contracted.

YoY. Similarly, the spike in provision for bad loans (+72%) erased total income growth (+9%) and caused sector net profit to be flattish. Again, NOII shined with 21% growth but was capped by the 7bp contraction in NIM. Glaring outliers were Affin, Alliance, and AMMB as 3 of them booked in substantially higher impaired loans provision while Public was hit by negative Jaws (opex accelerated a 5ppts faster vs revenue).

Other key trends. Loans growth tapered to 4.1% YoY (2Q19: +5.1%) while deposits slowed to 5.6% YoY (2Q19: +7.0%). Based on these two categories, the top 3 fastest growing banks were BIMB, CIMB, and Alliance (+5-11%). As for asset quality, gross impaired loans (GIL) ratio continues to weaken (+5bp QoQ to 2.06%), primarily due to bad business loans. Save for Affin and BIMB (new bad loans formation shrank), all the other banks under our coverage encountered similar problem.

Outlook. We expect 4Q19 to see some sequential earnings growth from further NIM recovery (through more downward deposit repricing and SRR cut) along with better investment gains being realized. However, 1H20 is seen to be challenging due to tepid credit demand and mild asset quality deterioration; this is amid softer present day macro climate as well as weak consumer and business sentiment. Also, our economist expects BNM to have an easing bias with a 25bp OPR cut by end-1H20.

Forecast. Following the cut on earnings for Affin and Alliance this reporting season, we are now forecasting 3-year aggregate net profit CAGR of 2.3% (FY19-21) for the sector vs our previous estimate of 2.4%.

Retain NEUTRAL. Although the growth outlook for banks is modest, we draw comfort from the sector’s inexpensive valuations as it trading near -2SD to its 5-year average P/B. Those that favour exposure to this sector have to be selective. We like banks that give above average dividend yields (Maybank; TP: RM9.50), still eking out healthy growth (RHB; TP: RM6.45 & BIMB; TP: RM5.00), and saw its valuations got bashed down to below -2SD and trough level (Alliance; TP: RM3.30).

 

Source: Hong Leong Investment Bank Research - 6 Dec 2019

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