Investment Highlights

• Banks’ 6M19 core calendarised earnings were marginally higher by 1.0% YoY with muted income growth albeit by lower provisions. 2Q19 earnings for banks grew 4.2% QoQ with higher non-interest income (NOII) partially offset by lower net interest income (NII) from an OPR cut of 25bps and funding cost pressure, coupled with upticks in provisions. The results of all banks came in within expectations except Alliance Bank. 2Q19 sector core calendarised earnings rose 4.2% QoQ after excluding CIMB’s one-off gains of RM236mil from the disposal of the Malaysian equities business to China Galaxy Securities. Maybank, CIMB and AMMB reported strong earnings in 2Q19. The results of Alliance Bank were below expectations as earnings were impacted by higher provisioning for loan losses (RM59mil) for three large corporate loans and allowances (RM49mil) for losses on financial investments/bonds which were related to one of the 3 impaired loans (Exhibit 2).

• Faster pace of loans with an industry growth of 1.3% QoQ in 2Q19. Growth of deposits decelerated vs. loans in the quarter, resulting in the sector’s net LD ratio rising slightly to 92.3%. Maybank, RHB Bank and Hong Leong Bank registered faster growth while loan growth was softer for AMMB and Alliance Bank (ABMB). On a YoY basis, loans for most banks grew at a faster pace than the industry’s 4.2% YoY growth as at the end of June 2019.

• Sector's average NIM was compressed by 7bps QoQ largely due to funding cost pressure and OPR cut of 25bps in 2H19. The sector's average NIM in 2Q19 was compressed by 7bps QoQ to 2.19%. This was driven largely by margin compressions of Maybank, Public Bank, RHB Bank, Hong Leong Bank, CIMB and Alliance Bank. 3Q19 should see the full quarter’s impact on banks’ NIMs from the earlier OPR cut of 25bps in May 2019. We are expecting another OPR cut of 25bps in 2H19 to 2.75%. CASA growth picked up pace for most banks resulting in a higher CASA ratio for the sector of 29.5%.

• Overall sector NOII was stronger QoQ contributed by treasury’s investment and trading income which benefitted from the lower yields. With the lower interest rate environment and trend of declining yields, we expect banks’ treasury segment to perform well in the near term, particularly in investment and trading income.

• Uptick in sector GIL ratio in 2Q19, with provisions rising QoQ from the impairments of business banking and corporate loans. The sector's GIL ratio rose to 2.00% from 1.91% in the preceding quarter with all banks registering upticks in impairments except Hong Leong Bank. The upticks in impairments of business loans were related to the manufacturing, agricultural and wholesale sectors. 2Q19 saw the sector’s provisions for loan impairments higher by 19.8% QoQ, contributed largely by lower net write-backs of AMMB and higher provisions of ABMB. For 2Q19, credit cost rose slightly to 0.22% (1Q19: 0.18%). 6M19 credit cost was 0.40% lower than 6M18’s 0.54%.

• The sector's calendarised core earnings growth for 2019 has been lowered to 0.6% from 2.6% earlier to factor in another OPR cut of 25bps in 2H19, and to adjust our credit cost assumption slightly higher. We maintain OVERWEIGHT on the sector as we continue to see compelling valuations and dividend yields for banks. Our top picks are RHB Bank and Maybank.

Source: AmInvest Research - 10 Sept 2019