Banking - Focus on the Less ‘Sensitive Stocks’

Date: 05/07/2018

Source  :  KENANGA
Stock  :  AMBANK       Price Target  :  4.50      |      Price Call  :  BUY
        Last Price  :  4.35      |      Upside/Downside  :  +0.15 (3.45%)
Source  :  KENANGA
Stock  :  BIMB       Price Target  :  4.90      |      Price Call  :  BUY
        Last Price  :  4.55      |      Upside/Downside  :  +0.35 (7.69%)

Lacking clarity post GE14, no fundamentals change expected and lacking any concrete catalysts, we are inclined to maintain a Neutral stance for the sector despite most of the banking stocks in our universe giving attractive propositions coupled with undemanding valuations due to recent price corrections. The on-going trade friction globally gave solid concerns on loans growth and uptick in credit costs ahead. We maintain on our view of moderate loans of 5-5.5% (with a downside bias) for FY18E hence revisions of our valuations for most banking stocks under our coverage. We prefer less-GLC linked mid-cap whose valuations are below their respective 5-year average. Our Top picks to the banking sector are AMBANK (TP: RM4.50) and BIMB (TP: RM4.90).

Post GE14, the FBMKLCI as of 22 June 2018 shed 6ppts YTD as investors took to concerns of potential risks ahead in the policies of the new government. The KL Finance Index (KLFIN) was no exception as it retreated back to its original position at the start of the year primarily dragged by CIMB (-11.2% YTD) and MAYBANK (-10.5% YTD) due to concerns of potential change in leadership and trade friction globally (Maybank and CIMB overseas contribution to PBT: 31% and 37% respectively). AMBANK’s weak performance (-17%) due to ongoing perception of its compliance issues. The resilient performance of HLBANK (6.6% YTD), PBANK (10.3% YTD) and RHBBANK (13.0% YTD) are attributed to their loans are skewed towards households and less exposed to controversial projects post GE14 coupled with strong asset quality of HLBANK and PBBANK with GIL less <1.0%.

A Recap on 1QCY18 Results

There were no surprises in 1QCY18 results as most were in line; with 2 (HLBANK and MBSB Bank) above and only 1 below (AMBANK). While for HLBANK, the positive deviation was due to again strong performances from its 19% China associate Bank of Chengdu, MBSB’s unexpected strong performance due to higher writeback (due to overprovisions from the preceding quarters). AMBANK’s performance was dragged by higher opex (attributed to MSS) and weak credit recovery (as normalization of credit charge ensues going forward). Overall earnings for the quarter was bolstered by lower impairment allowances falling by 7.8% QoQ and 11.1% YoY respectively as operating income was abysmal falling 0.1% QoQ (4Q17: +3.3% QoQ) and +9.2% YoY (1Q17: +8.2% YoY). On the loans front, loans growth were a disappointment at -2.1% QoQ and +2.4% YoY (stripping contribution from MBSB) with all banks with the exception of AMBANK falling below their initial targets. The quarter also saw disappointing fee-based income falling at 6.2% QoQ dragged by the heavyweights CIMB and MAYBANK at 14.9% QoQ and 15.2% QoQ respectively. On a positive note, asset quality improved as gross impaired loans (GIL) fell by 0.3% QoQ and 1.3% QoQ with GIL ratio at 2.0% (its 5-year low at 1.7%).

Looking ahead for the rest of the year

We still view loans growth to be moderate at 5-5.5% (with a downside bias) due to political and economic repercussions ahead albeit supported by resilient household spending. While post GE14 sentiments seemed to have taken its toll in May with both applications and approvals falling, we do expect pickups in the following months, especially from household with the stable energy prices and zero-rated GST (before the implementation of SST). Industry loans growth is expected to be under <7% for CY18 due to boosted contribution from MBSB bank. Stripping off the MBSB contribution, we expect industry loans to be <5%. We maintain our Neutral stance for the sector.

While economic outlook for 2018 is ranging from positive to stable, we view that the banks will still be selective on its asset growth, mindful of sudden volatile changes in the economic outlook; hence, we do not expect any changes in its strategy in light of the new political environment. Part of the caution on assets is to curb higher credit charge under the MFRS9 era. Although credit costs had normalised in 1Q and expected to do so for 2018, we do not discount volatility under the MFRS9 era if the economic outlook shifts downwards. At present, positive/stable economic outlook coupled with low unemployment is backing resilient household spending, supporting loans growth.

On a positive note, system asset qualities are improving, but we maintain our view that banks will maintain selective asset quality, mindful of volatile domestic and external environment ahead.

Credit charge expected to be normalize, but on-going uncertainties might entail higher provisioning. While we expect credit charge to normalize for 2018, we are mindfull of the volatile economic conditions ahead with the on-going trade friction globally. While we do not expect asset quality to deteriorate owing to stable/economy and low unemployment, the MFRS9 regime will entail a higher impairment allowances as it allows for provisioning for expected losses ahead >12 months ahead. Thus we do not discount volatile credit costs ahead.

NIM expected to be stable. On the NIM front, we expect it to be stable for 2018 on account of (i) loans growth moderating thus liquidity will be ample, (ii) we believe liquidity ample thus downside pressure on funding costs (May 18: excess liquidity at 10.9% vs its 1-year and 3-year low of 10.2%, and (iii) most banks have complied with the NSFR requirement and liquidity coverage ratio (LCR) well above 100%. We expect inflation to be contained with the removal of GST and fixed fuel prices thus we do not expect further OPR hike this year, which should keep NIM stable (with an upside bias).

Revision in earnings. Despite our downwards revision of several of the banks’ earnings namely AFFIN (-5.8%), AMBANK (- 14.9%), BIMB (-25%), CIMB (-1.4%) and MAYBANK (-1%) our CY18 earnings are revised slightly by +1.5% on account of contribution from MBSB Bank. The downward earnings revision of BIMB is due to its downward revision of its loans from low double digits to ~8% (on concerns of moderate corporate contribution post GE14), while for AMBANK is due to normalization of credit charge ahead as it enters into the MFRS9 era.

Source: Kenanga Research - 5 Jul 2018

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