Highlights

• Overall results: Most banks ended 4QCY17 results on a positive note, with the exception of AMMB.

• Loan growth: Loan growth grew at average by +1.3% qoq vs. +0.4% qoq in CY3Q17 supported by BIMB, RHB while Affin and ABMB reversed the negative trend.

• Deposit: Liquidity position improved at a muted pace of +0.7% qoq vs. +1.5% qoq, which tracked a slower loan growth and lifiting excess liquidity higher in CY4Q17.

• NIM: NIM was flat at 2.2% due to the absence of deposits competition and more stable COF.

• NOII: NOII grew at a stabilized pace of 4.8% qoq to RM5.4bn due to higher fee income and stable forex income.

• Credit cost. Improved to 39bps against 47bps in CY3Q17 due to absence of large impairments.

• GIL: The overall sector asset quality was unchanged at 1.64%.

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

Our Take

• We expect the sector’s earnings recovery to sustain into 2018 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.

• While we expect further stability in banks’ asset quality in 2018, certain segments may pose a risk to the potential stablility of asset quality.

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

• Liquidity is on the mend since BNM implemented forex measures that cap further liquidity outflow.

Risks

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

Rating

NEUTRAL ( ↔ )

• The encouraging signs in CY4Q17 will ensure loan growth target of 5%-5.5% is achievable due to positive lending indicators. We view that the banking sector is poised to record a better year in 2018 due to (1) improving ROE (led by earnings recovery); (2) improving NOII income; (3) stable asset quality; and (4) Less severe impact of MFRS9 impact.

Top Picks

• Maybank (BUY, TP: RM11.00) and RHB (BUY; TP: RM6.00).

Source: Hong Leong Investment Bank Research - 7 Mar 2018