Investment Highlights

• Banks’ 9M18 earnings (+6.6%YoY) tracking expectations with only BIMB beating our projected earnings. 3Q18 sector core calendarised earnings after excluding Hong Leong Bank’s one-off gain of RM72.2mil from the disposal of its 37.0% shareholdings in a JV company, Sichuan Jincheng Consumer Finance Limited, was marginally higher by 1.2%QoQ. For 9M18, core calendarised earnings of banks excluding CIMB’s gains totalling RM1.09bil from partial disposals of CSI, CPAM, CPIAM grew 6.6%YoY supported by lower opex and provisions for loan impairments. Results of banks were largely within expectations (Exhibit 2).

• Loan growth of banks gained momentum in 3Q18. Most banks registered stronger loan growth in 3Q18 on a YoY basis. Aggregate sector gross loans expanded at a faster pace of 4.8%YoY vs. 4.1%YoY in 2Q18. Based on Oct 2018 BNM statistics, domestic loans continued to pick up pace in recent months from improvement in business loans, registering a YTD growth of 5.4%. We are retaining our loan growth assumption of 5.0% for 2018 based on a GDP growth of 4.8–5.0% for the year. For 2019, we expect the industry to register a loan growth of 4.0–5.0% premised on a slower GDP expansion of 4.5–4.8%.

• The sector's average NIM contracted by 3bps QoQ to 2.27% in 3Q18 due to higher funding cost of AMMB, Public Bank and Hong Leong Bank. For Hong Leong, cost of funds rose due to intense deposit competition over the past one year. Meanwhile, CIMB Niaga and Maybank Indonesia’s NIMs were compressed by interest hikes in Indonesia. The OPR is expected to remain unchanged at 3.25% for the rest of 2018 and 2019. We expect NIM for banks in 2019 to be slightly compressed or flat at best compared with 2018. NIM could still be pressured by the slowdown in CASA growth and decline in CASA ratio despite the deferment in the implementation of the NSFR. It is not likely to see deposits rates offered to be as high as that in the deposit campaigns before the postponement of the NSFR.

• Pick-up in capital market activities in 3Q18 compared with 2Q18 but 3Q18 NOII still lower largely due to the decline in investment and trading income of Maybank and CIMB. 10-year MGS yield rose in Oct 2018. Capital market flows improved in 3Q18 compared with 2Q18. Nevertheless, markets remain volatile in the near term, and this is likely to continue to be challenging for banks’ fee income particularly from the IB and fund management business. For 2019, we have projected a softer NOII for the larger capitalised banks – Maybank and CIMB – from estimation in 2018.

• GIL ratio and credit cost for the sector stable in 3Q18 and we expect the steady asset quality for banks to be upheld for the rest of 2018. 9M18 provisions have declined by 20.7%YoY. For 2019, we expect the sector’s GIL ratio to rise slightly from a slowdown in economic growth. We have projected a moderate uptick in banks’ credit cost next year due to a slower GDP expansion.

• The sector's calendarised core earnings growth for 2018 is now projected to be higher at 6.5% from 5.8% earlier while for 2019, we expect a growth of 4.6%. We maintain OVERWEIGHT on the sector as banks’ earnings are still expected to in a positive trajectory while the stocks offer good liquidity and decent dividend yields. Our top picks are now Public Bank and Maybank.

Source: AmInvest Research - 5 Dec 2018