- Two banks surpassed expectations in 2Q. For the 2Q results season, there were only two banks whose performance came in above expectations – Hong Leong Bank (HLBB) and RHB Capital (RHB Cap).

- Third consecutive quarter of QoQ decline in sector net earnings. Sector net earnings continued to decline on a QoQ basis, for the third consecutive quarter. Net earnings came off by 1.0% QoQ in 2Q14, albeit slightly better than the 3.3% QoQ drop recorded in 1Q14. The latest quarter’s earnings were largely affected by slower capital markets and higher cost of deposits.

- Dragged down mainly by the non-interest income line. Non-interest income contracted for the second consecutive quarter (2Q14: -5.2% QoQ, 1Q14: -16.1% QoQ). This is due to ongoing impact from slower capital markets, which affected realisation of investment bank mandates. The generally slower corporate loans segment also reduced fee income on loans.

- Credit costs remained at historically low levels of only 15bps in 2Q14. Total gross impaired loans for the banks was seemingly better on a QoQ basis, as there was ongoing reduction in the sector’s impaired loans by 5.8% QoQ. However, the improvement was driven mainly by write-offs. The average gross impaired loans ratio for the banks we track was sustained at 1.8% in 2Q14, vs. 1.8% in 1Q14. Sector credit costs came off to only 15bps in 2Q14, from 17bps in 1Q14, mainly due to the absence of fresh corporate impaired loans for Maybank.

- Maintain NEUTRAL. Our sector net earnings growth assumption is broadly unchanged at 2.8% for 2014 and 12.6% for 2015. Our top picks are now HLBB and CIMB.

Source: AmeSecurities