- Majority of banks below expectations. Out of the seven banks we track closely, most came in below expectations.

- Slower loans growth. Gross loans growth on a bottom-up approach for the banks under our coverage was 2.2% QoQ in 1Q13, slower than the 3.6% QoQ growth rate in 4Q12. This was due to generally cautious sentiments, particularly in the corporate and SME segments.

- Non-interest income was also more subdued. Non-interest income’s performance was subdued with growth of only 1.1% QoQ in 1QFY13 (4Q12: 4.2% QoQ). This reflected a generally quiet quarter for the capital markets prior to the general election in May 2013.

- Slight deterioration in impaired loans, but these appear to be isolated one-off cases. The upticks came from Maybank, CIMB and RHB Cap. For Maybank, we believe these are likely related to a couple of medium-sized newly impaired loans, with one likely in the domestic-oriented segment and the other in the exports segment. The impaired loans included selected manufacturing accounts. RHB Cap’s new delinquent impaired loan was related to the manufacturing sector and attributed to the particularly slow cash flow environment in 1Q, but has since improved from April 2013 onwards. Thus, the sector credit cost is now slightly higher at 19bps in 1Q13 vs.16bps in 4Q12.

- Our annualised sector net earnings growth is upgraded slightly to 10.5% (from 9.9%) for 2013. Our sector loans growth assumption from a bottom-up approach is now 9.0% for 2013. Our non-interest income growth assumption is 9.3% for 2013 (2012: 13.7%, 2011: 3.6%). Our sector credit cost assumption is now 35bps (vs. 33bps earlier) for 2013. This is above most banks’ credit costs guidance of 20bps to 30bps for 2013.

- Maintain overweight. The uptick in impaired loans in 1Q was attributed to a slow cash flow environment ahead of the general election. Thus, we expect the upticks to be temporary with most banks now seeing meaningful improvement after the general election in early May 2013. We expect key re-rating catalysts from better loan leading indicators, as well as buoyant capital market for the non-interest income segment. We have now included RHB Cap as one of our top picks given our recent upgrade in RHB Cap’s fair value to RM9.50 from RM8.90. Our other top picks are CIMB and MBSB.

Source: AmSecurities