- Second consecutive quarter of earnings mostly below consensus estimates. Almost all of the seven banks we track closely fell short of consensus forecasts.

- Stronger loans growth. Gross loans growth on a bottom-up approach for banks under our coverage expanded at a stronger rate of 3.1% QoQ in 2Q13. The stronger growth came from a pick-up in auto and ASB unit trust financing segments for CIMB, business loans for HLBB, consumer and SME loans for Maybank, and personal loans and nonresidential mortgage loans for RHB Cap. Corporate loans remain muted across the board. The good news is the sector’s net interest margin (NIM) - based on our house estimates - continued to fall at a slower rate for the second consecutive quarter with only a 3bps QoQ decline in 2Q13 (1Q13: -2bps QoQ).

- Non-interest income contributed by forex gain. Non-interest income expanded at a strong rate of 7.9% QoQ in 2Q13, compared to only 1.1% QoQ. However, this was contributed partly by an unrealised forex gain for Maybank, while there were lower gains on securities for the banks in general.

- Second consecutive quarter of uptick in impaired loans. Total gross impaired loans for the banks recorded a second consecutive quarter of QoQ uptick, at 1.3% QoQ in 2Q13, compared to +2.3% QoQ in 1Q13. Thus, the sector credit cost has climbed to a more normalised level of 30bps in 2Q13, compared to 19bps in 1Q13. This came mainly from specific provisioning or individual assessment expense related to large corporate accounts for Maybank and RHB Cap.

- Our annualised sector net earnings growth assumption has been downgraded to 9.0% (from 10.3% previously) for 2013 following this results season. Our sector loans growth assumption from a bottom-up approach is now at 9.3% for 2013 and 8.3% for 2014. Our sector NIM assumption is a 5bps YoY drop to 2.52% for 2013 (from 2.57% previously) and 2.54% for 2014. Our non-interest income growth assumption is 7.5% (from 9.3% previously) for 2013 and 2.5% for 2014. Our sector credit cost assumption is now at 26bps for 2013 and 24bps for 2014. Nevertheless, we expect to further review our credit costs assumption ahead.

- Maintain Neutral. We maintain our cautious stance on the sector, despite recent declines in selected banking stocks’ share prices. Our sector top pick is Public Bank (PBB).

Source: AmeSecurities