Investment Highlights

• Banks’ 12M18 core calendarised earnings grew 6.8%YoY with results of all banks falling within our expectations. 4Q18 sector core calendarised earnings, excluding Hong Leong Bank’s further gains of RM17.8mil from the disposal of its 37.0% shareholdings in a JV company, Sichuan Jincheng Consumer Finance Limited, increased 5.0%QoQ. For 12M18, normalised earnings of banks, excluding CIMB’s gains totalling RM1.09bil from partial disposals of CSI, CPAM, CPIAM and Hong Leong Bank’s total gains of RM90mil from the sale of the JV company stake, grew 6.8%YoY. Earnings were supported by modest total income, lower opex and provisions for loan impairments. Results of all banks were within our expectations (Exhibit 2).

• Loan growth of banks continued to gain traction in 4Q18. Growth of loans was slower than deposits in the quarter. Most banks registered stronger loan growth in 4Q18 on a YoY basis. Aggregate sector gross loans expanded at a faster pace of 5.4%YoY vs. 4.8%YoY in 3Q18. The sector’s loan growth in 2019 is expected to be 4.0–5.0% lower than in 2018. This will be in line with the projected moderation in domestic economic growth to 4.5%. We expect consumer and business loan growth to taper in 2019 with the latter due to a slowdown in exports.

• Sector's average NIM is stable but expected to mildly compress ahead due to higher funding cost. We expect NIM for banks in 2019 to be slightly compressed by mid-single digit due to rise in funding cost as we gather from banks that deposit competition intensified again. Although CASA growth for the sector remains slow, some banks have yet to raise their base rates for the increase in cost of funds. We see this as an avenue for banks to mitigate the pressure on their funding cost.

• Capital market activities were softer in 4Q18 though some improvements were seen in 3Q18. We continue to project a flat noninterest income (NOII) for the sector in 2019. For 2019, we retain our projection of softer NOII for the larger capitalised banks, Maybank and CIMB. Markets remain volatile, and this is likely to continue to be challenging for banks’ IB fees, and investment and trading income.

• GIL ratio improved with lower credit cost for the sector in 4Q18, and we expect asset quality for banks to remain stable in 2019. 4QFY18 saw lower new impaired loans formation, recoveries and write-off contributing to the sector’s lower impaired loans. 12M18 provisions declined 28.1%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 this year due to the slower GDP expansion.

• The sector's calendarised core earnings growth for 2019 is now projected to be 4.5% from 4.6% earlier. We maintain OVERWEIGHT on the sector albeit a moderate growth in earnings. This is due to the anticipation of global liquidity into emerging markets from a slowdown in normalisation of the US monetary policy that is widely expected. The fund inflows are expected to benefit share prices of banking stocks which are liquid, offering decent dividend yields with banks still expected to deliver positive growth in earnings despite challenging conditions. Our top picks are RHB Bank, BIMB Holdings and Maybank.

Source: AmInvest Research - 7 Mar 2019