Highlights

• Upgrade to OVERWEIGHT as various positivities and values have emerged.

• Several themes for 2018 that will take the spotlight;-

1. Attractive earnings growth will lead to healthy ROE

We expect banks to post 9% bottomline growth in 2018 vs. 10% in 2017, underpinned by topline expansion from higher operating profit and receding provision level.

2. Decent loan growth

For 2018, we project 5.0%-5.5% system loan growth, tracking GDP growth that will be backed by business loans (part of from SME loan).

3. Stable asset quality

We expect further stability in banks asset quality in 2018, however certain segments may pose a risk.

4. Potential 25bps of OPR hike as early as Jan-18

An OPR hike of 25bps, we estimate the potential uplift of +2% - +3% to net profit, depending on banks composition of loan sensitivity (variable vs fixed),

• The concern on MFRS9 to banks earning is easing with the potential usage of regulatory reserve to offset the additional provision level.

• Despite positive value emerging for the sector, there is pocket of weakness. In regard, we take this opportunity to downgrade AMMB earnings on accounts of subdued loan growth and the tapering net credit cost. Likewise, we tweak down earnings of BIMB due to moderation in loan growth was severed than expected.

• We have 4 BUY ratings, namely Maybank, RHB Bank, CIMB and BIMB , 4 HOLD rating on Affin Holdings, Alliance Bank, Public Bank and AMMB Holdings.

Risks

• The downside risks to our call are (1) significant deterioration in asset quality, and (2) further weakening of loan growth 3) severe NIM compression.

Rating

• OVERWEIGHT ( )

• As various values and positivities have emerged, we revised our sector rating from NEUTRAL to OVERWEIGHT given 1) attractive earnings growth will lead to healthy ROE 2) decent loan growth of 5%-5.5% 3) stable asset quality 4) attractive valuations.

Top Picks

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

Source: Hong Leong Investment Bank Research - 11 Jan 2018