1Q18 Roundup: Holding Up Steadily

Based on our 1Q18 review, most banks had decent fund-based income and non-interest income growth on a yoy and qoq basis. NIM rose marginally to 2.28% yoy and qoq, propped up by impact of the 25bps OPR hike in Jan18. Overheads remained sticky at most banks, while Alliance and AMMB had rationalization/transformation initiatives rolled-out, which bumped up overall costs. Provisioning eased yoy largely due to CIMB and Maybank, while credit charge rate was down about 4bps yoy to 28.2bps. Sector ROE improved by about 6bps yoy. Among the banks, Hong Leong Bank (1Q18 net profit +21% yoy) and RHB Bank (+18% yoy) were outperformers vis- à-vis 1Q17. Maintain OVERWEIGHT on the sector.

1Q18 Banking Sector Net Profit Within Our Expectations

The Malaysian banking universe reported a 1Q18 net profit of RM6.48bn (+12.3% yoy, +2.3% qoq), while normalized 1Q18 net profit was at RM6.34bn (+9.8% yoy; +3.5% qoq). The sector’s 1Q18 net profit was within our expectation, accounting for 24.5% of our 2018 projection of RM26.4bn. During the quarter, we have bumped up earnings forecasts for Alliance Bank for FY19E (+8.2%) while the rest of the banks’ forecasts are unchanged. The notable upgrade was on CIMB (BUY, PT RM7.50) due to its steep discount.

Fund-based Income Rose +2.3% Yoy, Remains the Sector’s Key Driver

1Q18 fund-based income (+2.3% yoy; +0.5% qoq) has remained the major earnings driver (despite subdued loan growth of 2.3% yoy), generating an average 74% of bank’s total net income. On average, the sector saw a +4bps yoy expansion in 1Q18 NIM to 2.28% (comprising largely domestic operations) on the back of a 25bps OPR hike and steady domestic loan pricing. Meanwhile, there was no spike in significant NPL accounts, as implied by a steady gross NPL ratio of 1.57% end-Mar18 and easing in sector credit cost (-4bps yoy) in 1Q18. Operating expenses remained relatively sticky against the recent quarters.

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

Maintain OVERWEIGHT. We foresee sector core earnings growth of 6.6% yoy in 2018E, followed by a more modest 4.3% yoy in 2019E and 4.0% yoy in 2020E. Our top picks include Maybank (MAY MK, BUY, PT RM12.00 @ 1.74x CY19E P/BV) for broad exposure to economic activities coupled with attractive dividend yields. Hong Leong Bank (HLBK MK, BUY, PT RM20.70 @ 1.57x CY19E P/BV) is poised for stronger performance as it leverages on ample balance sheet liquidity coupled with recovery in BOCD’s earnings. Key downside risks: new NPL formation, NIM compression, higher funding costs, weaker loan growth, much higher provisions on FRS 9 adoption.

Source: Affin Hwang Research - 6 Jun 2018