The banking sector’s 3QCY17 earnings were within expectations, with no negative surprises while the 9M17 outlook has improved with topline driver from fund-based income. Overall, the banks’ NIM have been holding up, while overall credit cost was off their peaks in 2016 coupled with lower impairments (overseas assets). We look for 2017-19E earnings to grow by 8.2% yoy, 5.6% yoy and 3.8% yoy respectively. Amongst the banks, Hong Leong Bank and Maybank were outperformers. Maintain OVERWEIGHT on the sector.

3Q17 Banking Sector Net Profit Within Expectations

The Malaysian banking universe reported a 3Q17 net profit of RM6.2bn (+8.5% yoy, +9.3% qoq), while normalized 3Q17 net profit of RM6.29bn rose +8.5% qoq. Overall, 9M17 earnings were in-line with our expectation. During the quarter, we have adjusted down CY2017E’s earnings forecasts for CIMB (-11%) and AMMB (-7.2%) and hence, our 2017E net profit forecast now stands at RM23.5bn (a -2.1% qoq revision from RM24bn).

Fund-based Income Expands at 10% Yoy, the Sector’s Key Driver

Fund-based income (9M17 +10.3% yoy; 3Q17 +10.6% yoy, +0.7% qoq) has remained the major earnings driver (despite subdued loan growth of 5% yoy), generating an average 74% of the bank’s total net income. On average, the sector saw a +9bps yoy expansion in 9M17 NIM to 2.33% while drilling down to each individual banks, NIM expansion ranged from ‘flat’ to a +19bps for 9M17. Meanwhile, as cases of spike in NPLs at some banks have moderated, we saw the 9M17 impaired loan allowances declined by 4.8% yoy while the sector’s average credit cost eased from 40bps (9MCY16) to 35.7bps (9MCY17). On the other hand, the banks are seeing operating expenses up +5.5% yoy for 9M17 on the back of branch-remodelling initiatives, new hires and digital investments.

Maintain Sector OVERWEIGHT; Big Cap Stock Picks: Maybank, HLB

Maintain OVERWEIGHT. Favourable economic fundamentals, ample infrastructure projects and a potential interest rate hike in 2018 should continue to drive earnings. For our big cap top picks, we like Maybank (MAY MK, BUY, PT RM10.50 @ 1.5x CY18E P/BV) for broad exposure to economic activities coupled with attractive dividend yields. Hong Leong Bank (HLBK MK, BUY, PT RM17.00 @ 1.38x CY18E P/BV) is poised for stronger performance as it leverages on ample balance sheet liquidity coupled with recovery in BOCD’s earnings. Key risks: higher overheads, increase in credit cost and weaker loan growth.

Source: Affin Hwang Research - 6 Dec 2017