- Mixed performance in 2Q. Of the seven banks we follow closely, four banks’ performances were below expectations, while two were in line (PBB and RHB Cap). HLBB performed slightly above expectations.

- Flat net earnings on a sequential basis. Sector net earnings remained flat for a second consecutive quarter, with a minor +0.7% QoQ movement. Revenue was supported mainly by the net interest income line in 2Q15, while there was ongoing there was ongoing contraction in the non-interest income line, due to subdued capital market activities.

- Larger rise in impaired loans. Total gross impaired loans – from a bottom-up approach for the banks we cover – rose at a larger rate of 5.1% QoQ in 2Q15, if compared to 1.0% QoQ in 1Q15. This was due mainly to higher impaired loans in regional operations in Thailand, Indonesia and Singapore. Malaysia operations’ impaired loans were largely stable. We estimate stable sector credit cost of 29bps in 2Q15, compared to 30bps in 1Q15.

- Sector core normalised net earnings growth estimated at 2.9% for 2016F. In terms of revenue assumption, our sector loans growth assumption from a bottom-up approach is now 7.7% for calendar year 2015F and 7.2% for calendar year 2016F. Our sector NIM assumption is revised to -16bps (from -7bps previously) YoY for 2015F, and -6bps YoY for 2016F. Our non-interest income growth assumption is 9.2% for 2015F, and +2.4% for 2016F. Our sector net earnings growth assumption is now 3.3% for 2015F, and 5.4% for 2016F. Earnings growth of 5.4% for 2016F is distorted by oneoff restructuring costs for CIMB, which we estimate amounts to RM650mil in 2015F and contributing to a low base effect in 2015F. Thus, excluding the one-off restructuring forecasts, we estimate normalised net earnings growth of 2.9% in 2016F.

- Sector credit cost is estimated at 29bps in 2Q15, not much changed from 1Q15’s 30bps. In terms of credit costs forecasts, we are now projecting a higher sector credit cost of 37bps in 2016F, from 26bps for 2015F. This is to reflect the potential knock-on contagion effects from the recent macro uncertainty.

- Maintain NEUTRAL. As mentioned in our earlier reports, the key banking industry indicators we are watching out for are deposit growth, LDR, and liquidity. Aside from this, the positive indicators to watch for are stabilisation in macro economic data. We remain NEUTRAL on the sector. 

Source: AmeSecurities Research - 4 Sep 2015