Highlights

• Keeping NEUTRAL call on the sector due to various lingering macro headwinds. However, we may turn positive in 2H17 when the short-term headwinds diminish.

• There are several positive drivers within the banking sector, and we believe these would at least partly offset the headwinds: 1. Asset quality to remain robust in 2017 due to tapering of provision programme and waning R&R classifications; 2. Lesser concern on liquidity due to less competitions, and we believe it is still ample to fund domestic economic growth; 3. Continuing cost effective operation to achieve desired loan-to-deposit ratio given the inability to grow income at high pace; and 4. Valuations (from P/B viewpoint) have turned attractive following share price corrections.

• Our earnings forecasts for Maybank and CIMB are revised, whilst others are maintained. For Maybank, we impute lower NOII contribution, while for CIMB, we factor in lower credit cost assumption. TP for banks under our coverage are updated to reflect changes in valuation parameters and rolling over of base year.

• Post revision, BUY call on Maybank, RHB Bank and AFG is maintained. We upgrade Affin to HOLD.

Risks

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

Rating

NEUTRAL ( ↔ )

• We keep our NEUTRAL stance on Banking sector due to modest growth outlook for earnings, loan and deposit growth. The modest earnings growth will result in lower ROE and lower the expected return.

Top Picks

• Maybank (BUY, TP: RM8.80), RHB Bank (BUY, TP: RM5.31) and Alliance Financial Group (BUY, TP: RM4.20).

Source: Hong Leong Investment Bank Research - 6 Jan 2017