CY1Q18 was a decent quarter for most banks (except for AMMB, which missed our expectations). Net profit increased at stronger pace of 10.4% YoY in 1Q18 (vs. 5.2% YoY in 4Q17), supported by (i) higher NII arising from a 25 bps OPR hike in Jan-18, and (ii) flattish overheads (due to deconsolidation of CIMB brokerage expenses to CSI). Loan growth was muted as strengthening Ringgit against major currencies contributed to the subdued loan growth. Banks shored up liquidity position, led to improving CASA ratio. Capital remains intact despite moderation in the Tier 1 and core capital as a result of implementation of MFRS9. We reiterate our 2018 loan growth target at 5-5.5%. Maintain OVERWEIGHT. Top picks: RHB (TP: RM6.00) and Maybank (TP: RM11.00).

Banks under our coverage posted firmer 1Q18 results, with total net profit (recorded by the 8 banks under our coverage) rising by 0.9% QoQ and 10.4% YoY to RM6.5bn. During the quarter, 7 out of 8 banks came in within our expectation, while AMMB’s results disappointed (see Figure #1).

Profitability

Net profit

Net profit for the sector rose 10.4% YoY to RM6.5bn in 1Q18, supported by (i) higher NII of RM13.9bn (2.6% YoY, arising from a 25bps OPR hike in Jan-18, which has in turn resulted in NIM expansion) and (ii) flattish overhead expenses (0% YoY). AMMB and Alliance’s net profits eased by 24.5% and 3.8%. This was derailed by (i) higher operating expenses incurred and (ii) normalising of loan-loss-provision due to lack of recoveries (for AMMB’s case), and (iii) pick up in overhead expenses related to certain products investment incurred for Alliance. Other banks recorded double-digit earnings growth (Affin: +18.5%; BIMB: +13.8%; CIMB: +10.6%; Maybank: +10%, Public Bank: +12.6%; and RHB: +18.1% YoY), thanks to i) higher NOII (ii) positive JAWS and (iii) stable credit cost Overall, overhead expenses remained flattish during the quarter and this was driven mainly by deconsolidation of CSI expenses from CIMB’s balance sheet. Nevertheless, we witnessed several banks (in particularly, RHB and Alliance) expanding their overhead expenses related to investment in products.

NOII

NOII was decent at RM5.1bn (+6% YoY). This was supported by higher other NOII namely trading income and sale of investment securities, driven from favourable forex movement. RHB posted stronger NOII due to one-off gain investment in Private Equity company whilst Public Bank continued to be supported by its unit trust division. On QoQ, NOII was disappointed (-5.6%) as the deconsolidation of brokerage income from the disposal of 50% stake in CSI.

NIM

Driven by 25bps OPR hike in Jan-18, NIM grew 2bps YoY to 2.29% benefiting from 25bps OPR hike in Jan-18. For Affin, NIM expanded 2bps YoY driven from improving CASA ratio, however NIM decreased 7bps QoQ as Affin was growing its expensive deposits, to comply with NSFR requirement. We expect NIM to normalise in coming quarters, when re-pricing of longer term fixed deposits kick in. During the quarter, Alliance experienced the largest NIM increment (by 16bps YoY to 2.41%), attributed to the OPR hike and higher loan yield assets in its loan portfolio.

Lending indicator

Loan growth

Loan growth picked up marginally by 3.1% YoY (vs. 3% YoY in 4Q17). Having experienced loan contraction for the last 2 consecutive quarters, Alliance finally posted a positive growth (2.5 YoY), thanks to improvement in high RAR loan which grew 19.3% YoY. CIMB and Maybank posted subdued loan growth of 0.5% YoY and 1.5% YoY respectively, as the strengthening Ringgit against the others currencies contributed to the subdued loan growth. Nevertheless, both domestic loan growth rose healthy of 7.9% and 6.7% respectively. Alliance introduced more aggressive loan growth guidance of 10% YoY (for FY19) whilst other banks shared more conservative outlook (with loan growth target of 5- 6%). Alliance loan growth target is banking on latest initiatives, namely Alliance One Account and Alliance@Work that gaining traction from its customers.

Deposits

Customer deposits grew on a firmer note on YoY and QoQ basis as bank shored up their liquidity positions before GE14. Customer deposits rose 1.7% QoQ and 2.6% YoY. Except for Alliance (which reduced its expensive deposit positions in order to improve NIM), most banks posted higher customer deposits growth, and this has in turn resulted in better CASA position.

Asset quality

Credit cost

Credit cost deteriorated by 5bps YoY as the deterioration was weighed by provision of lumpy accounts. The deterioration in credit cost was derailed by Maybank (-20bps) and Alliance (-9bps), whilst Affin and AMMB reversed to the net recovery position.

Gross impaired loan

Asset quality deteriorated marginally to 1.83% from 1.78% in 4Q17. Among the banks, we note that Alliance posted the sharpest increase in GIL ratio (which increased by 25 bps QoQ to 1.43%) due to hire purchase and non-residential accounts. Nevertheless, we believe that the increase in the Alliance GIL is temporary before it heads back to its normalised level.

MFRS 9

Affin, CIMB, Maybank and RHB reported the new accounting standard (MFRS 9) for the first time. It was a mixed impact for each bank, of which some of the banks have positive impact to capital as opposed to the guidance given. MFRS9 negatively impact capital ratio for CIMB, Maybank, RHB whilst Public saw its CET1 increased by 20bps. Alliance and AMMB will be reporting MFRS9 starting in Jun-18 results, which both guided muted impact to their CET1 ratios. We also witness, LLC improved as a result of the implementation of MFRS9 as provision levels trending higher.

Rating

Maintain OVERWEIGHT. The change of ruling government during GE14 poses uncertainties to the implementation of mega infrastructure projects which could pose a risk to business loan growth. Nevertheless, we are positive that HH loan could fill the slack as certain segments in the HH are set to benefit from the tax holiday period. In addition, new ruling government’s manifesto could assist HH loan such as (i) increase in minimum wages, (ii) introduction of more RTO scheme (iii) lower excise duty for <1500cc vehicles. We view that the banking sector is poised to record a better year in 2018 due to (i) improving ROE (led from recovery of earnings); (ii) improving NOII income; (iii) stable asset quality; and (iv) less severe of MFRS 9 impact.

Top Picks

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

Source: Hong Leong Investment Bank Research - 18 Jun 2018