Despite all banks posted earnings within our expectations, we deem that 2Q18 was a subdued quarter for most banks. During the 2Q18 results, banks under our coverage reported a total core earnings of RM6.3bn (QoQ: -3.5%; YoY: +8.4%), which is in line with our expectations. Average loan growth of 3.6% YoY was helped by stronger consumer loan segment, while average NIM was stable at 2.29% (unchanged since 1Q18). Credit cost trended lower for most banks as the implementation of MFRS was well received by banks. We reiterate our 2018 loan growth target at 4.5-5.0%. Maintain NEUTRAL. Top picks: Public Bank (TP: RM26.00).

During 2Q18 results, banks under our coverage reported total core earnings of RM6.3bn (QoQ: -3.5%; YoY: +8.4%), which is in line with our expectations.

Profitability

Net Profit

YoY, total core net profit grew 8.4% to RM6.3bn in 2Q18, as marginally higher net interest income and lower provisions were more than offset by weaker non-interest income (NOII). During the quarter, 7 out of the 9 banks reported higher core net profit, while Affin and CIMB reported weaker core net earnings. We note that the 48.5% decline in Affin’s 2Q18 core earnings was due mainly to higher loan loss allowance, while the 5.4% decline in CIMB’s core earnings was due to lower NOII (arising from forex losses and deconsolidation of CIMB Securities).

QoQ, total core earnings declined by 3.5% to RM6.3bn in 2Q18, as muted net interest income growth (+0.4%) was more than offset by weaker NOII. During the quarter, we note that 5 out of 9 banks (namely, Affin, AMMB, BIMB, Hong Leong Bank, and Maybank) registered a decline in core net earnings, dragged mainly by lower net interest income and non-interest income, as well as higher loan loss allowance (in particular, Affin, AMMB and Maybank).

NOII

During 2Q18, total NOII declined by 12.5% QoQ and 7.9% YoY to RM4.5bn, and this was due mainly lower capital market activities (due to GE14 factors) and deconsolidation of CIMB brokerage income.

YoY, only 3 out of 9 banks that we track recorded positive growth in NOII (namely BIMB, Hong Leong Bank and RHB). Among the 6 banks that reported lower NOII, the decline was more apparent in Affin (-31.1%), CIMB (-21.8%) and Alliance (-18.1%). Weaker capital market activities and forex losses aside, we note that the decline in CIMB was also due to deconsolidation of CIMB Securities.

QoQ, only Affin and Maybank reported higher NOII (which increased by 14.3% and 5.1% respectively). Among the 7 banks that reported lower NOII, Alliance, CIMB and RHB reported the sharpest decline in NOII by 21.9%, 21.1% and 45.4% respectively.

NIM

Overall, average NIM was stable at 2.29% (unchanged since 1Q18). There was mixed reaction to NIM following to the OPR hike in Jan-18 as several banks posted NIM compression. Alliance posted the largest NIM expansion to (+27bps YoY to 2.53% in 2Q18), while CIMB posted the largest decline in NIM (-23bps YoY to 2.48%). The notable NIM expansion in Alliance was due to its higher risk adjusted return (RAR) loan growth. The decline in CIMB’s NIM was mainly due to a 100bps hike in Indonesia’s policy rate.

We expect NIM compression in 2H18 on the back of heightened deposit competition to comply with net stable funding ratio (NSFR) and repricing of more longer term deposits (following OPR hike).

Expenses

Overhead expenses remained generally well-managed, witnessed by positive JAWS recorded by most banks, thanks to cost savings arising VSS exercises carried by several banks earlier. Among the 9 banks that we track, only Alliance, Maybank and Public Bank posted higher overhead expenses, and we understand that the increase in overhead expenses in these 3 banks are related to establishment cost, specifically on the investment on the digital initiatives.

Lending Indicators

Loan Growth

Average loan growth of 3.6% YoY (based on the 9 banks we tabulated) was helped by stronger consumer loan segment (arising from tax holidays and overall improvement in consumer sentiment) which more than mitigated weaker corporate loan segment. Smaller banks with niche strength benefited from this period, as evident with Affin, Alliance and AMMB posting higher loan growth of 4.9% YoY, 3.6% YoY and 6.1% YoY respectively, due mainly to their strength in residential mortgage sub-segment.

Deposits

Customer deposits advanced by 5.2% YoY led primarily by AMMB (+6.3% YoY), Maybank (+5.5% YoY) and Public Bank (+4.1% YoY) while Alliance and CIMB moderated to 5% YoY and 0.1% YoY respectively. The stronger deposit growth in 2Q18 was entirely driven by fixed deposits, while CASA grew on a flattish trend. For Alliance, the weaker deposits growth was caused by its move to shore up deposits taking during the OPR hike. For AMMB, the strong deposit growth was the result of its effort to attract more sticky and individual deposits and thus to improve its NIM. LDR was subdued for most banks which saw the upwards movements due to tighter loan growth position.

Asset Quality

Credit Cost

The implementation of MFRS was well received by banks as the credit cost trending lower for most banks, except Affin which was impacted by specific accounts. During 2Q18, AMMB still posted net write back in loan loss provisioning related to RM116m of recoveries. While for Maybank, it incurring higher impaired loan from Hyflux accounts. As for Alliance, it continues to post higher credit cost, which is within management’s guidance in line with its strong loan growth

Gross Impaired Loan

Asset quality deteriorated marginally to 1.83% in 2Q18 from 1.57% in 1Q18. Among the 9 banks that we track, we note that Alliance posted the sharpest increase in GIL ratio (which increased by 25 bps QoQ to 1.6%) attributed to several non-residential and working capital segments which amounted to RM43.2m. Nevertheless, management indicated that the spike in GIL is temporary due to its active R&R program which should lead to an expected write-back in the subsequent quarters.

Rating

Maintain NEUTRAL. We reiterate our Neutral rating on banks as near term headwinds are emerging such as lower loan growth, NIM compression and slower net profit growth. On a brighter note, banks managed to contain expenses by reporting positive JAWS and the implementation of MFRS9 have limited the downside for escalating credit cost. Our top pick is Public Bank (BUY, TP: RM26.00).

Source: Hong Leong Investment Bank Research - 18 Sept 2018