- Bigger banks lag behind expectations. The 3Q results performance was mixed, with the bigger banks lagging behind expectations. Among the banks we cover, three came in above expectations. These are Alliance Financial Group (AFG), Public Bank (PBB) and RHB Capital (RHB Cap). We deem Hong Leong Bank (HLBB) to be in line. Two of the bigger banks – CIMB and Maybank – came in below expectations.

- NIM improvement was disappointing, as it rose by only 1bps QoQ. The sector’s net interest margin (NIM) rose by only 1bps QoQ in 3Q14 (2Q14: -1bps QoQ). We consider the increase to be disappointing given that there should be a positive impact from the 25bps rate hike which came into effect on 10 July 2014. The lower-than-expected expansion in NIM is due mainly to higher cost of deposits, with most banks alluding to ongoing competitive pressure on deposit.

- Higher impaired loans. There was an upward trend in total gross impaired loans, with absolute amount moving up by RM1.2bil, or + 5.5% QoQ in 3Q14. This was partly due to one large group of companies involved in shipbuilding construction.

- Credit costs still at a historically low level of only 19bps in 3Q14 (2Q14: 15bps). However, the sector’s loan loss cover had continued to soften to 88.3% in 3Q14, from 93.9% in 2Q14 and 96.5% in 1Q14 – indicating that some of the newly impaired loans were not fully provided for yet in the 3Q14.

- Our sector net earnings growth assumption has now been downgraded to 0.6%, from 12.6% previously, for 2015F. This is mainly on the back of a revision in our sector loan loss provision and credit costs forecast. We have revised our sector credit costs forecast to 41bps, from 29bps, for calendar year 2015F (2014F: 36bps). In terms of loan loss provision, we now expect the sector loan loss provision to rise ahead to RM4,994mil (from RM3,501mil previously) for 2015F. We believe credit costs may remain relatively high, due to sporadic weaknesses in the corporate segment, as well as retrenchments exercises for consumers employed in the airline and media segments.

- Maintain NEUTRAL. Our sector net earnings flat growth projection is now much lower than that of consensus’ net earnings growth forecast, which is 10% for 2015. We remain NEUTRAL on the sector. We expect NIM compression as well as credit costs to be major issues of uncertainty ahead for 2015.

Source: AmeSecurities