2Q17 Roundup: Earnings Holding Up Qoq

The banking sector’s 2QCY17 earnings were mostly within expectations. There were no negative surprises and the outlook appears to be improving with banks’ NIMs holding up, while overall credit costs were sharply off their peaks in 2016. The key risk relates mainly to operating expenses. We look for 2017-19E earnings to grow by 10.5% yoy, 4.4% yoy and 3.8% yoy respectively. Our big-cap top picks are Public Bank and Maybank. In the mid-caps, we like AMMB, Hong Leong Bank and AFG. Maintain OVERWEIGHT on the sector.

2Q17 Banking Sector Net Profit in Line With Expectations

The Malaysian banking and financial universe reported a 2Q17 net profit of RM5.7bn (+18.7% yoy, -1.5% qoq), while normalized 2Q17 net profit of RM5.8bn was flat qoq. Overall, 1H17 earnings were in line with our expectation of a full-year net profit forecast of RM24bn. Except for Hong Leong Bank, our overall sector earnings forecast changes have been minimal.

Fund-based Income Still the Key Earnings Driver

Fund-based income (1H17 +9.3% yoy; 2Q17 +9.8% yoy) has remained the banking sector’s major earnings driver generating an average 74% of the banks’ total net income, while the balance of 26% was from noninterest income (1H17 +1.1% yoy). On average, the sector saw an improvement of 7bps yoy in 1H17 NIM to 2.32%; most banks reported a yoy improvement of 5-14bps in 1H17 NIM (except for RHB Bank, which saw its NIM down by 4bps yoy). Our key concern over the 2QCY17 results lies mainly in the banks’ operating expenses, which have continued to edge up by 5.4% yoy and 3.8% qoq vs. our projection for a flat CY17. Meanwhile, the sector’s average credit cost of 37bps in 1HCY17 is relatively in line with our CY17 projection of 36bps.

Maintain Sector OVERWEIGHT; Big-cap Stock Picks: PBB, Maybank

We maintain our sector OVERWEIGHT rating. 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 big-cap top picks, we like Public Bank (TP of RM24.00 @ 2.3x CY18E P/BV) as a strong defensive bank and Maybank (TP RM10.50 @ 1.5x CY18E P/BV) for broad exposure to economic activities and attractive dividend yields.

2QCY17 Core Earnings Rose 21% Yoy, Flat Qoq. Within Expectations

The banking sector ended 2Q17 with headline net profit at RM5,688m (+18.7% yoy; -1.5% qoq) while normalized net profit was RM5,790.3m (+20.9% yoy; +0.3% qoq). 1H17 sector earnings of RM11,462.5m (+16.4% yoy) (core net profit: RM11.5bn, +17.4% yoy) was within our full-year 2017 forecast of RM24bn, though there were some minor revisions on Hong Leong Bank’s (HLB) earnings forecasts (due to additional tax provisions to be set aside for 2017). The overall sector earnings forecast revisions have been relatively minor after the 2Q17 earnings round concluded, i.e. -0.1% for 2017E; +4.5% for 2018E; +0.2% 2019E. With respect to each bank’s 2Q17 results in our universe, all were within our expectations as well (based on a ± 5% variance interval). The banking sector’s ROE has continued to hold up well, at 10% as at 2QCY17 vs. 10.3% in 1QCY17 and 9.2% 2QCY16.

Details of each bank’s quarterly net profit and core net profit and a comparison of our universe’s earnings forecasts (before and after) are in Figs 2-7.

During the quarter, we ceased coverage on Malaysia Building Society Berhad as the stock’s ROE expectation from 2017-19E is expected to stay below our minimum expectation of 10% for an investor’s cost of equity (despite the anticipation of an improving earnings outlook).

Source: Affin Hwang Research - 13 Sept 2017