- Likely uptick in credit costs ahead in 2016. During our latest company visits, some banks have started to indicate that industry credit costs are likely to move up to a new normalised level of 40bps next year, from a normalised level of 30bps this year.

- New normalised level may be higher than 40bps. Historically, credit costs usually start to increase in six months to a year after a slowdown in growth. This was the case during the 2008/2009 external financial crisis when credit costs peaked about six to nine months later at 107bps in mid-2009. Given that a crisis scenario similar to that in 2008/2009 is unlikely, we believe that credit costs may not reach the average of 60-70bps seen in 2008/2009. However, arguably a normalised credit costs of 40bps may seem unusually benign, in terms of historical experience, given the slowing exports growth, soft deposit growth, and tighter liquidity for the industry.

- Potential further downside if credit costs goes higher to 50bps. We have done a sensitivity analysis to determine the potential impact from higher credit costs to net earnings and fair value of the banks under our coverage. Assuming credit costs of 50bps, there is further downside for all the banks, with the following potential fair values – AFG (RM4.10/share); CIMB (RM5.00/share), HLBB (RM12.30/share), Maybank (RM8.40/share), PBB (RM16.50/share), and RHB Cap (RM7.10/share).

- Sector net earnings growth estimated at 4.0% for 2015 and 10.1% for 2016. In terms of sector net earnings growth, we estimate a lower net earnings growth of 4.0% for 2015, compared to consensus’ 6.1%, for 2015. As for 2016F, our sector net earnings growth assumption is now 10.1%, while consensus estimate is 10.8% growth. Sector net earnings is skewed upwards in 2016 due to the low base effect for CIMB, and this is largely due to one-off restructuring costs which are expected to be fully provided for in FY15F. Without the large one-off restructuring costs, our core net earnings growth for 2016 works out to be a lower 6.7%. If sector credit costs moves up to 50bps, our sector net earnings growth is estimated to decelerate to 2.8% YoY.

- Maintain NEUTRAL. The indicators to watch for ahead, in our view, are deposit growth, industry LDR, and liquidity – all of which have been relatively muted. Aside from this, we believe oil price, exports and GDP growth may be three macroeconomic indicators that may influence banks’ share prices in this current cycle. Exports growth had been unusually anaemic, recording contractions of 8.8% YoY in April 2015 and 6.7% in May 2015. This is despite the recent sharp depreciation in the Ringgit. Oil and petroleum exports recorded the largest contractions. We remain NEUTRAL on the sector.

Source: AmeSecurities Research - 29 Jul 2015