Investment Highlights

• All 7 banks’ earnings were within expectation for 2Q17. 2Q17 sector core earnings slipped 2.0%QoQ largely due to higher provisions for loan losses and an impairment of RM108mil on RHB Bank's corporate bonds in Singapore. All 7 banks' earnings kept pace with expectations. The results of Maybank, Public Bank, RHB, Hong Leong Bank, CIMB and AFG came in within our expectation while AMMB’s earnings met consensus expectation.

• Slower sector loan growth in 2Q17 while the industry's NIM remained stable on quarter-on-quarter basis. Aggregate sector's loan slowed down to 5.9%YoY in 2Q17 from 8.0%YoY in 1Q17. This was driven mainly by a slower pace of loans in the local as well as most international markets. Overall sector's NIM remained stable at 2.29% in 2Q17 vs. 2.30% in 1Q17. Pressure on NIM is still expected for 2H17 due to keen deposit competition in the market.

• JAW improved to +2.6% on a QoQ basis with the sector's CI ratio lowered to 47.2% in 2Q17. Sector operating expenses (OPEX) were well controlled as it fell 0.6%QoQ. Against a core operating income growth of 2.0%QoQ, the sector recorded a positive JAW of 2.6% with a lower CI ratio of 47.2% in 2Q17 compared to 48.3% in 1Q17 (1Q17: negative JAW of 2.9%).

• Rise in impaired loans pushed the sector's gross impaired loan (GIL) ratio higher in 2Q17. The sector's GIL ratio rose to 2.04% in 2Q17 vs. 2.00% and 1.97% in 1Q17 and 4Q16 respectively. This was largely contributed by Maybank which had stress in retail and corporate banking loans in Indonesia and Singapore. There continued to be weakness in the asset quality of oil & gas sector loans in Singapore. This was evidenced by the loan impairment of Maybank's oil & gas loans and the impairment of corporate bonds in Singapore for RHB Bank related to the same segment. CIMB also had stress in its Singapore oil & gas loans albeit a small exposure. QoQ, all banks reported a rise in impaired loans which included Public Bank and Hong Leong Bank's domestic loans.

• Provisions rose 31.8%QoQ driven largely by Maybank and CIMB's higher allowances for loan losses. Credit cost in 2Q17 rose to 0.42%, an increase from 1Q17's 0.34%. Nevertheless, for cumulative earnings (1H17) except for Maybank, credit cost for all other banks came in within our expectation.

• After the conclusion on 2Q17 results, we have trimmed the sector's calendarised core earnings growth for 2017 to 6.4% from 8.6%. We have lowered the sector's earnings growth for 2017 after imputing higher credit cost and CI ratio estimates for Maybank and Hong Leong Bank. Maintain our BUYs on Public Bank (fair value: RM22.20/share) and RHB Bank (fair value: RM6.00/share).

Source: AmInvest Research - 12 Sept 2017