The banking sector’s 1QCY17 earnings quarter concluded with banks within our universe reporting earnings mostly within expectations. There were no negative surprises and the outlook appears to be improving with banks’ NIMs getting better, while credit costs have declined sharply from the peak in 2016. Key risk relates mainly to operating expenses. We look for 2017-19E earnings to grow by 10.6% yoy, 3.8% yoy and 4.1% yoy respectively. Our bigcap top picks are Public Bank, CIMB, and Maybank. Maintain OVERWEIGHT on the sector.

1Q17 Banking Sector Net Profit in Line With Expectations

The Malaysian banking and financial universe reported a 1Q17 net profit of RM5.83bn (+15.7% yoy, -3.8% qoq), while normalized 1Q17 net profit of RM5.83bn actually grew by 8.5% qoq (excluding a one-off gain at Maybank in 4Q16). This was in line with our CY17 net profit forecast of RM24bn (pre-revisions). Despite some earnings revisions on AFG and RHB, our overall sector earnings forecast changes have been minimal.

CIMB, Maybank, AMMB, MBSB – Outstanding Performance in 1Q17

In our view, banks and non-banks, which have not been reporting favourable operating results in the past one to two years, have started to show a rebound in net profit, for instance, CIMB and MBSB (which we had recently upgraded to a HOLD). In the 1QCY17 results, most banks reported a 10-20bps NIM improvement yoy on the back of higher loan yields and ease in funding pressure (1QCY17 average NIM rose 7bps yoy to 2.334%). Our key concern in 1QCY17’s results is mainly on the banks’ operating expenses, which have been higher by 4.8% (on an annualized basis) vs. our projection for CY17 due to IT spending, investing in new talent, marketing costs and compliance costs. Meanwhile, the sector’s average credit cost of 32bps in 1QCY17 has been below our CY17 projection of 35.7bps.

Maintain Sector OVERWEIGHT; Top Picks: PBB, CIMB, Maybank

We maintain our sector OVERWEIGHT call. Favourable domestic demographic trends (driving consumption and housing needs), ample infrastructure projects in the pipeline and an accommodative monetary policy (2017 OPR expectation: 3.0%) should continue to drive earnings. Key risks: higher overheads, new NPL formation, NIM compression, higher funding costs, and weaker loan growth. For our top big cap picks, we like Public Bank TP of RM24.00 @ 2.3x CY18E P/BV) as a strong defensive bank, CIMB (TP at RM7.50 @ 1.4x CY18E P/BV) for its turnaround story and Maybank (TP RM10.50 @ 1.5x CY18E P/BV) for broad exposure to economic activities.

Source: Affin Hwang Research - 14 Jun 2017