Investment Highlights

• Banks’ core earnings for 1H18 results largely within expectations. 2Q18 sector core earnings fell marginally by 0.4%QoQ after excluding CIMB’s one-off gain of RM928mil from the partial disposal of CIMB-Principal Asset Management (CPAM) and CIMB-Principal Islamic Asset Management (CPIAM) and an additional gain of RM11mil from the sale of a 50.0% stake in CIMB Securities International (CSI) as well as adding back Hong Leong Bank’s one-off loss of RM27mil from the dilution of stake in its associate, Bank of Chengdu (BOC). Nevertheless, 1H18 earnings of banks still grew by a commendable 10.3%YoY. On core earnings, except for CIMB which its core earnings were below our expectation, the other banks’ results came in within estimates. Cumulative calendarised earnings of Maybank, Public Bank, RHB Bank, Hong Leong, ABMB and BIMB Holdings were within our expectations while that of AMMB meet consensus projection.

• Loan growth picked up pace in the 2Q18 for most banks. We expect loan growth for 2H18 to be marginally better than 1H18 with consumer loans gaining traction in 3Q18 as consumer spending rises with the tax holiday while business loans are expected to improve somewhat looking at the better loans momentum for domestic non-household loans in the recent months. We retain our loan growth assumption of 5.0% for 2018 with a slight downside bias based on a GDP growth of 4.8-5.0% for the year.

• The sector's average NIM fell by 6bps QoQ to 2.30% in 2Q18 after an OPR hike of 25bps in Jan 2018 which expanded NIMs of most banks in 1Q18. The decline of the NIM in 2Q18 was due to the upward repricing of deposit rates after the OPR increase in 1Q18 and higher funding cost from deposit competition moving close to the adoption of the NSFR. We expect pressure to remain on funding cost in the near term due to deposits’ competition. Nevertheless, we expect NIM for 2H18 to be either flat or slightly compressed compared to 1H18 as the deposit repricing from the earlier OPR hike has already largely worked its way through banks’ funding cost.

• Excluding one-off gains, non-interest income (NOII) was softer in 1H18 from slower capital market activities and a decline in investment and trading income, particularly in 2Q18. In July and August 2018, MGS yields have tapered from the highest for the year in June 2018, and we are seeing a pick-up in bond issuances and improvement in investment and trading income. We expect an improvement in banks NOII in 3Q18 compared to 2Q18. 2H18 NOII is likely to improve compared to 1H18 but for the full 2018, we do not expect the sector’s NOII be higher than 2017.

• Uptick in GIL ratio for the sector in 2Q18 but the sector's asset quality is expected to remain stable in 2H18. 2Q18 provisions have declined by 8.4%QoQ while for 1H18 these were down 23.8%YoY. We expect banks’ asset quality and provisions to remain stable in 2H18.

• The sector's calendarised core earnings growth for 2018 is now projected to be lower at 5.8% from 7.6% earlier in line with the expected slowdown in GDP growth. With the inclusion of BIMB’s expected improvement in profits which we had revised higher after 2Q18 results, we project the sector’s earnings to grow by 6.2% in 2019. For 2019, we project a stable NOII for the larger banks, Maybank and CIMB, while NIMs are anticipated to steady or at a slight expansion compared to 2018. Our top picks are Public Bank and BIMB. We like banks with a favourable proxy to the consumer and SME segments as well as those with attractive valuations.

Source: AmInvest Research - 7 Sept 2018