Latest  Trends

• We expect certain headwinds (which al ready existed since 2015) will persist into 2016. These include: (1) Loan growth to ease further on slower economic growth; (2) NIM to remain under pressure; and (3) NOII will remain subdued.

• Despite the headwinds, there are also several positive drivers within the banking sector, and we believe these would at least partly offset the headwinds as mentioned above. These positive drivers include: 1. Asset quality to remain robust in 2016 (albeit a slight deterioration may be seen); 2. Lesser concern on liquidity, and we believe it is still ample to fund domestic economic growth; 3. Valuations (from P/B viewpoint) have turned attractive following share prices corrections; and 4. Full impact of cost management initiatives to kick in by 2016, and this should help cushion banks’ bottomlines .

• Earnings forecasts of AFG, Affin, CIMB and RHB Cap were trimmed, largely to reflect our expectation of weaker NOII.

• Post earnings forecasts changes and update of valuation parameters; TPs of 6 out of the 7 banking stocks were trimmed by 3.6-17% (except for Public Bank, whereby TP was raised by 2.1%).

• We downgraded our recommendation on Affin to Sell (from Hold), as valuation has become excessive post earnings downgrade. Recommendations for the remaining 6 banking stocks remain unchanged.

Risks

• Risk of recession and its impact on asset quality, portfolio losses (MTM and realized), as well as non-interest income growth.

Rating

NEUTRAL

• Posi tives – Best proxy to 11MP and RAPID, domestic consumption (albeit slower) and economy; strong asset quality; robust capital ratios; and capital management.

Negatives

• Competitive pressure on margin, GST impact on consumer sentiment, tougher envi ronment increase chances of higher defalts and port folio losses from foreign outflow.

Top Picks

• Maybank, RHB Cap, and CIMB.

Source: Hong Leong Investment Bank Research - 6 Jan 2016