- All the banks fell short of consensus’ forecasts in 1Q. All the banks’ net earnings came in below market consensus estimates in 1Q. The main reason for the shortfall to our net earnings in the case of CIMB, Maybank, PBB and RHB Cap, was the soft non-interest income that was partly buffered by low loan loss provisions.

- 1Q a seasonally short working quarter, compounded by slower capital market. Sector net earnings fell 3.3% QoQ in 1Q14, the second consecutive quarter of QoQ decline in recent times (4Q13: -2.6% QoQ). 1Q is a seasonally slow quarter, compounded by slower capital markets.

- Slow net interest income and non-interest income ... Net interest income declined marginally, by -0.8% QoQ in 1Q14 (4Q13: +2.0% QoQ), mainly due to higher interest expenses. Non-interest income growth contracted 16.1% QoQ (4Q13: +0.2% QoQ), mainly due to the impact from softer capital markets.

- ... leading to the first QoQ contraction in revenue in three years. With both the net interest income and non-interest income registering contractions in 1Q14, the operating income revenue line posted a negative growth of 5.6% QoQ in 1Q14 (4Q13: +1.4% QoQ). This was the first QoQ decline for the revenue line in three years, since March 2011. .

- Credit costs remain low at only 17bps. Total gross impaired loans for the banks improved on a QoQ basis, given that there was a reduction in the sector’s impaired loans, by 7.7% QoQ. Sector credit cost remained low at only 17bps in 1Q14, vs. 19bps in 4Q13. There were a couple of new impaired loans in the corporate segment in 1Q.

- Maintain NEUTRAL. Our sector net earnings growth assumption is broadly unchanged at 2.3% for 2014 and 5.0% for 2015. This remains below that of growth forecasts from consensus, which is now at 8.9% (revised from 8.0%) for 2014 and 10.5% for 2015. Most banks continue to hint at rising price pressure in the deposit market in this quarter. There is now increasing expectations of an interest rate hike ahead, in view of Bank Negara Malaysia’s (BNM) latest indications. We have not yet included an interest rate increase in our forecasts, but we expect marginal earnings upgrade from a possible rate hike, which is likely to be partly offset by higher loan loss provisions. 

Source: AmeSecurities