Highlights

• Overall results: All banks posted results in line with our estimates in CY3Q17, except for Affin impacted by higher opex.

• Loan growth: Loan growth rose on average by +4.4% YoY vs. +5.6% in 2Q17 supported by retail and SME segment.

• Deposit: Liquidity position improved for 4 quarters sraight at a muted pace of +2.5%YoY, tracking a slower loan growth and lifiting excess liquidity higher in CY3Q17

• NIM: NIM improved by 1bps QoQ to 2.22% due to advance in CASA and repricing of assets

• NOII: Unfavourable market conditions and inexciting capital market brought NOII flat at RM4.92bn (+0.3% QoQ), and lowering percentage of NOII total income to 29%.

• GIL: The overall sector asset quality improved significantly to 1.2% in CY3Q17 vs. 1.6% in CY2Q17, reflecting the BNM Oct- 17 statistics, reinforced by across all banks

• Capital: Overall capital position remained robust and was well positioned to weather headwinds.

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 stay NEUTRAL on the sector due to the uncertainty of MFRS9 implementation on bank earnings. Various liquidity measures are also expected to put more pressure to bank NIM. We expect share price movements to be more muted into the remainder of the year as we see limited re-rating catalyst for the banking sector.

Top Picks

• Maybank (BUY, TP: RM10.70), and RHB (BUY; TP: RM5.60).

Source: Hong Leong Investment Bank Research - 11 Dec 2017