Investment Highlights

• Banks’ 12M19 core calendarised earnings growth was flat at 2.0% YoY due to a subdued interest income which was impacted by the OPR cut of 25bps in May 2019 and higher provisions. This was despite an increase in non-interest income supported by higher investment and trading income from lower bond yields. 4Q19’s sector core calendarised earnings rose 6.7% QoQ after excluding CIMB’s gains from the group’s RM41.3mil disposal of loans and adjusting out RM17mil of transformation initiative expenses and the write-off of intangible assets of RM277mil (Exhibit 2). Earnings of Maybank, Public Bank, RHB Bank, Hong Leong Bank, CIMB, Alliance Bank (ABMB) and BIMB were within our expectations while that of AMMB met consensus estimates.

• Loan growth picked up pace to 1.2% QoQ in 4Q19 with a higher growth of corporate loans from Maybank, CIMB and RHB Bank. International loans were generally softer for the larger cap banks. Based on the coverage of our stock universe, the YoY growth in loans was 4.2%.
   
• The sector's NIM improved 2bps QoQ in 4Q19 due to improved funding and repricing of FDs to lower rates after the 25bps OPR cut in May 2019. Our banks’ earnings have already factored in a 50bps of rate reduction for this year which includes the 25bps OPR cut announced on 3 Mar 2020. There is still downside risk on interest income and NIM of banks ahead with room for another OPR cut of 25bps to 2.25%. This is based on the dovish tone of Bank Negara’s monetary policy statement issued on 3 Mar 2020 after the OPR was reduced to 2.50% from 2.75%. At this juncture, we have yet to factor in another rate cut of 25bps into our estimate of banks’ earnings. This may come in as early as the next rate MPC meeting on 5 May 2020. We are monitoring the spread between the interest rate swap and KLIBOR closely. The interest rate cut cycle is back again with the Federal Reserve’s latest rate cut of 50bps to counter the downside risk from Covid-19. Regionally, Thailand, Indonesia and the Philippines have also cut their rates to address Covid-19 (Exhibit 13).
   
• Muted growth in the sector’s NOII QoQ in 4Q19. Higher fee income was offset by lower investment and trading income in the quarter. We see a potential revaluation or marked-to-market gains on bank’s securities portfolio with YTD compression in the 10-year MGS yields by 41.1bps to 2.89%. FVTOCI reserves of banks are also likely to increase arising from the decline in yields. Opportunities remain for banks to further monetise gains by disposing bonds to recognise the profits in their P&Ls and partially mitigate the impact of NIM compression from OPR cuts.

• Improved GIL ratio for the sector in 4Q19 to 1.98% with lower impaired loans in Maybank and RHB Bank. Credit cost in 4Q19 was lower at 0.27% (3Q19: 0.39%). 12M19 saw a credit cost of 0.29%, higher than the 0.26% in 12M18.

• The sector's calendarised core earnings growth for 2020 is now revised to 1.2% from 5.5% after factoring in 50bps of rate cut into our estimate for banks’ earnings. Maintain NEUTRAL on the sector with headwinds to interest income and NIMs from rate cuts and potentially higher credit cost from a slowdown in economic growth due to external uncertainties (including the duration for the Covid-19 outbreak to play out) as well as the political uncertainties domestically. Our top picks are Maybank, RHB Bank and Hong Leong Bank.

Source: AmInvest Research - 6 Mar 2020