Highlights

• 1Q16 earnings performance of most banks will likely come in flattish on yoy basis, as we expect the 6.4% yoy system loan growth to be partly offset by subdued NOII and lower interest spread. Asset quality of banks, on the other hand, will hold up well in 1Q16, taking cue from BNM’s latest IL ratio

• We are more upbeat on the sector’s fortunes for 2H16, underpinned by several positive catalysts including higher loan growth, easing of NIM compression and robust asset quality.

• We expect the system loan growth to pick up more significantly in 2H16, underpinned by the implementation of large scale infrastructure projects, which in turn is evidenced by the record high domestic contract awards to listed contractors (RM34bn worth of contracts awarded YTD, vs. RM21.9bn worth of contracts awarded in 2015).

• We believe the erosion in NIM may be bottoming soon, on more disciplined deposit competition and potentially higher base rates or spread (based on our channel checks). Higher lending rates, coupled with more disciplined deposit competition will result in easing of NIM compression.

• We continue to hold the view that asset quality will remain robust, underpinned by improved financial position among corporates, contained unempl oyment rates, and banks’ robust credit scoring systems, which should mitigate potential widespread delinquencies.

Risks

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

Rating

NEUTRAL

• Positives – 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 environment increase chances of higher defalts and portfolio losses from foreign outflow.

Top Picks

• Maybank and RHB Cap. We have a trading buy call on CIMB.

Source: Hong Leong Investment Bank Research - 18 May 2016