Investment Highlights

• Banks’ 3M19 core calendarised earnings slipped by 8.0% QoQ and 1.3% YoY. QoQ, the decline was largely due Maybank’s lower earnings as marked-to-market losses for financial liabilities dampened the group’s non-interest income. Nevertheless, results of all banks came in within expectations. 1Q19 sector core calendarised earnings fell 8.0% QoQ to RM6.2bil after excluding CIMB’s one-off gains of RM15.8mil from the disposal of its 51.0% shareholdings in CIMB Howden Insurance Brokers, and AMMB’s gains of RM285mil from the sale of retail NPLs. Earnings of all banks — Maybank, Public Bank, RHB Bank, Hong Leong, CIMB, ABMB and BIMB — were within our expectations while that of AMMB met consensus estimates (Exhibit 2).

• Decent loan growth with most banks’ domestic loans outpacing the industry growth of 4.9% YoY. Growth of deposits remained faster than that of loans in the quarter, improving the sector’s net LD ratio to 91.5%. Loan growth was a mixed bag for banks with 4 banks (AMMB, Public Bank, Hong Leong and Alliance Bank) registering faster growth while the other 4 banks (Maybank, RHB, CIMB and BIMB) recorded a softer loan momentum QoQ. Aggregate sector gross loans expanded by 0.8% QoQ or 5.7% YoY in 1Q19. On YoY basis, loans for most banks grew at a faster pace than the industry’s 4.9% YoY growth. We continue to project a loan growth for sector of 4.0–5.0% for 2019 vs. 2018’s 5.6% growth. This is premised on the projected base case domestic economic growth of 4.5%.

• Sector's average NIM was compressed by 2bps QoQ largely due to higher funding cost. Also impacting margins were normalisation of deposit rates from the OPR hike last year as well as some pressure on retail loan rates. We expect NIM for banks in 2019 to be compressed by the rise in funding cost as well as the recent OPR cut of 25bps in May 2019. The impact on NIMs from the OPR reduction will be temporary as we anticipate banks’ quarterly margins to improve subsequently. This is based on our expectation that banks’ deposit rates will be largely repriced lower after 1 to 2 quarters from the rate cut. CASA growth for the sector remains slow, and this is expected to put pressure on banks’ funding cost.

• Overall sector NOII was softer QoQ despite improvement in banks’ investment and trading income in 1Q19. The dampener was Maybank’s losses on financial liabilities as aforementioned. Markets remain volatile, and we continue to see challenges for banks’ IB fees, and investment and trading income.

• Uptick in sector GIL ratio in 1Q19, with provisions rising QoQ attributed largely to Maybanks’ top-up in provisioning for Hyflux estimated to be S$243mil or RM730mil and provisionings for newly impaired loans. On a YoY basis, 1Q19 provisions declined by 32.2% owing to net write-backs in impairment allowances of AMMB from RM285mil gains in retail NPL sale and a resolution of corporate NPL. Meanwhile, for Public Bank, the group reported write-backs in provisions for stage 1 for expected losses under the MFRS 9 and higher recoveries. For 2019, we continue to expect the sector’s GIL ratio to rise slightly from a slowdown in economic growth.

• The sector's calendarised core earnings growth for 2019 is now projected to be 2.6% from 4.5% earlier. We maintain OVERWEIGHT on the sector as we continue to see compelling valuations and dividend yields for banks albeit a moderate growth in earnings in 2019. Our top picks remain unchanged. These are RHB Bank, BIMB Holdings and Maybank.

Source: AmInvest Research - 10 Jun 2019