Investment Highlights

• Banks’ 9M19 core calendarised earnings were marginally higher by 1.3% YoY supported by a recovery of NIM in 3Q19 from repricing of deposits post-OPR cut of 25bps in May 2019, and realised gains from sale of bonds holding up noninterest income (NOII). 3Q19 sector core calendarised earnings rose 1.2% QoQ after excluding CIMB’s gain of RM114mil from the group’s disposal of loans, including Niaga’s sale of NPLs circa RM100mil and adjusting out RM349mil of transformation expenses. (Exhibit 2). Earnings of Maybank, Public Bank, RHB Bank, Hong Leong Bank and CIMB were within our expectations while that of AMMB met consensus estimates. Alliance Bank’s results continued to disappoint due to the weaker asset quality resulting in higher provisions for loan impairments while earnings of BIMB beat expectations with a stronger income from its takaful business.

• Loan growth decelerated to 0.8% QoQ or 4.6% YoY in 3Q19. Corporate loans in Malaysia continued to be slow as these were impacted by repayments. In line with the softer pace of loans, deposit growth was also seen slowing down QoQ as some banks released expensive deposits to manage liquidity, thus lowering the funding cost. The sector’s net LD ratio stood at 92.3%.

• The sector's NIM staged a recovery, expanding by 5bps QoQ in 3Q19 as funding cost improves as a result of deposits repricing to lower rates after the OPR cut of 25bps in May 2019. We expect NIMs to further improve in 4Q19 as more deposits (FDs) are repriced to lower rates upon maturity of the funds. The sector's average NIM in 3Q19 improved by 5bps QoQ to 2.24% supported by margin improvements of AMMB, Maybank, RHB, Hong Leong Bank and CIMB. CASA ratio for the sector improved modestly to 29.8%.

• Overall sector NOII was lifted slightly QoQ with the continued support from treasury investment and trading income which saw securities/bonds being sold to realise gains benefitted from lower yields. We see further room for recognizing gains from sales of bonds in a sustained low interest rate environment. YTD banks’ FVTOCI reserves are seen rising from the positive markedto-market impact of bonds sitting on banks’ balance sheet. This leaves potential to further harness gains from disposal of bonds moving forward thus allowing banks to recognise these profits in their P&Ls.

• Uptick in GIL ratio in 3Q19 for most banks except Public Bank and BIMB. The sector's GIL ratio climbed to 2.04% from 2.00% in the preceding quarter. For 3Q19, credit cost rose to 0.39% (2Q19: 0.22%). Annualised 9M19 credit cost of 0.26% was similar to that of 9M18.

• The sector's calendarised core earnings growth for 2019 is now revised to 0.9% from 0.6% as the OPR cut of 25bps expected in 2H19 did not materialise. We project the sector's core earnings to grow by 5.5% in 2020 supported by a modest income growth of 4.6% with higher net interest income (NII) from loan expansion and a modest growth in noninterest income (NOII) of 3.4%. We maintain OVERWEIGHT on the sector as we continue to see compelling valuations and dividend yields for banks. Our top picks are Hong Leong Bank, RHB Bank and Maybank.

Source: AmInvest Research - 6 Dec 2019