Investment Highlights

• Two banks’ (Maybank and Hong Leong Bank) core earnings are above our expectation in 4Q17's results. 4Q17 sector core earnings slipped 3.3%QoQ after excluding Maybank's one-off gains of RM185mil from the disposal of property, plant & equipment. Also, the decline was attributed to AMMB's higher provisions due to normalising credit cost, RHB Bank's prudential RM104mil impairment on bonds related to the oil & gas sector in Singapore and CIMB's lower earnings due to higher operating expenses and allowances for other impairment losses. Maybank and Hong Leong Bank’s earnings were above our expectations. For Maybank, it was due to lower-than-expected provisions while for Hong Leong Bank, the variance to our expectation was due to higher-thanexpected net interest income (NII), lower provisions and stronger share of profit from its associate in China, Bank of Chengdu. Public Bank, RHB Bank, CIMB and ABMB's results were in line while AMMB’s earnings were short of consensus expectation.

• Loan growth remains soft with a slowdown in international loans, which partially offset the domestic loan growth as well as due to the impact of FX translation with the strengthening of the ringgit. Aggregate sector's loan slowed down to 2.0%YoY in 4Q17 from 5.0%YoY in 3Q17. This was dampened by the slower loan growth of international markets and well as FX translation impact with the stronger domestic currency. Generally, banks are guiding for a higher loan growth of 5-6% in 2018 compared to 2017. Overall sector's NIM fell to 2.25% in 4Q17 vs. 2.27% in 3Q17 with most banks recoding flat to a slight decline in margins. Funding cost for Maybank rose QoQ. We expect banks' NIM to improve in 1Q18 vs. 4Q17 due to the increase in OPR by 25bps in January.

• Sector's CI ratio stable at 47.2% based on core income. Sector operating expenses (opex) were well controlled with a growth of 1.5%QoQ. Against a core operating income growth of 1.1%QoQ, the CI ratio was 47.2% in 4Q17 compared to 47.0% in 3Q17. Digitalisation initiatives and strategies of banks are poised to gradually improve banks' cost base.

• Lower provisions by 20.8%QoQ as asset quality improved with the sector's gross impaired loan (GIL) ratio decline in 4Q17. The sector's GIL ratio fell to 2.01% in 4Q17 vs. 2.09% in 3Q17. All banks reported lower provisions QoQ with the exception of AMMB, which recorded a net provision in the quarter compared to a net write-back in provisions in 3Q17.

• We are now projecting the sector's calendarised core earnings growth for 2018 to be 9.3% compared to 10.1% previously. Our projection for the sector's core earnings growth for CY18 is now lowered to 9.3% compared to 10.1% previously. This is due to the higher earnings base of CY17 after the completion of the 4Q17 results. We maintain our OVERWEIGHT stance on the sector with BUY calls on RHB Bank (FV: RM6.30/share), Public Bank (FV: RM24.30/share) and Alliance Bank (FV: RM4.40/share).

Source: AmInvest Research - 8 Mar 2018