- Most banks trailed expectations in 3Q. Of the seven banks we follow closely, only two were in line with expectations. The rest of the banks’ September 2015’s net earnings trailed market consensus forecasts.

- Flat net earnings in September 2015. Sector net earnings growth was flat the September 2015 quarter, expanding at only 1.2% QoQ. NIM improved unexpectedly by 5bps on QoQ basis in 3Q15, in contrast to the 4bps QoQ decline seen in 2Q15.

- Credit costs spiked up in 3Q15. Total gross impaired loans – from a bottom-up approach for the banks we cover – rose at a faster pace at 6.5% QoQ in 3Q15, if compared to 5.1% QoQ in 2Q15. Credit costs spiked upwards to 44bps in 3Q15, from 29bps in 2Q15.

- Some surprises in 3Q results season for the banks. The main positive surprise from the 3Q15 earnings season was the better-than-expected NIM, which had unexpectedly improved 5pbs QoQ in 3Q15 (from a contraction of -4bps in 2Q15), although this seems to be partly contributed by a temporary effect from the natural run-off of the more expensive short-term wholesale deposits which were taken in towards the end of 2014. Otherwise, all the banks are hinting at a likely higher cost of deposit ahead. The major negative surprise was the sharp upturn in credit costs for the sector, which has now jumped to 44bps in 3Q15 from 29bps in 2Q15.

- We forecast sector credit cost at 38bps in 2016F. In terms of calendarised credit cost, our assumption is broadly unchanged at 31bps (previously 27bps) in 2015F, and 38bps (previously 37bps) in 2016F.

- Sector core normalised net earnings growth estimated at 5.1% for 2016F. Our sector net earnings growth assumptions are now -0.4% (from 3.3% previously) for 2015F, and +9.1% (from 5.4% previously) for 2016F. However, earnings growth for 2016 is distorted by one-off voluntary separation scheme (VSS) restructuring costs, which we estimate amount to RM650mil for CIMB in 2015F, as well as the RM308.8mil for RHB Cap in FY15F. These contributed to a low base effect for the sector net earnings in 2015F. Thus, excluding the one-off restructuring forecasts, we estimate normalised net earnings growth to be at 5.1% (previously 2.9%) in 2016F. We remain NEUTRAL on the sector.

Source: AmeSecurities Research - 3 Dec 2015