Highlights

• Overall results: Only AFG missed our estimates for CY1Q17.

• Loan growth: Loan growth for banks accelerated to 0.9% QoQ, supported by retail and SME segment.

• Deposit: Liquidity position improved for the second consecutive quarter in CY1Q17, expanding at a faster pace of +1.6% QoQ (CY4Q16: +1.2% QoQ).

• NIM: Average NIM in CY1Q17 was unchanged at 2.04% with several banks recorded higher NIM.

• NOII: NOII fell for the second consecutive quarter by -4.8% QoQ in the absence of forex and one-off gains.

• GIL: Gross impaired ratio inched up marginally to 1.63% from 1.61% in CY4Q16

• Capital: Overall capital position remained robust and was well positioned to weather headwinds, supported by CET ratios of more than 10%.

Our Take

• We maintain our 2017 loan growth forecast at 6.0% YoY, supported mainly by business segment that will capitalize on the development spending as well as recovery in the SME segment.

• We expect banks to post earnings recovery in 2017, on the back of 1) higher loan growth expectations 2) stable contribution from NOII 3) continued discipline on expenses, and 4) ending of impairment programme.

• We expect banks’ loan loss coverage (LLC) to improve in CY2017 given the slower trend of large provision.

• BNM measures to mandate conversion of export proceeds may eventually help to increase system liquidity.

Risks

• Deteriorating asset quality that will impact banks provisioning level and high household debt that will push consumer sentiments lower.

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: RM9.90), and BIMB (BUY; TP: RM4.86).

Source: Hong Leong Investment Bank Research - 8 Jun 2017