The banking sector reported a 2Q18 core net profit of RM6.16bn, holding up well with a 6.4% yoy growth, though down 2.6% qoq due to decline in non-interest income and increased impaired loan allowances. Meanwhile, 1H18’s pre-provision operating profit was up by 2.8% yoy, with the bulk underpinned by a marginal expansion in fund-based income (+1.6% yoy) while 1H18 core net profit (+8.1% yoy) was driven by sharply lower provisions (Maybank, CIMB). In 2H18, we believe loan growth will be more robust while operating expenses could plateau, but will be mitigated by higher provisioning. Among the banks, Maybank (2Q18 core net profit +18% yoy; +4.7% qoq) was an outperformer vis-à-vis 2Q17 and 1Q18. Reaffirm our OVERWEIGHT stance on the sector.

2Q18 and 1H18 Banking Sector Net Profit Within Our Expectations

The Malaysian banking sector net profits came in at RM7.1bn (+25.3% yoy, +9.4% qoq) in 2Q18, while normalized net profit was at RM6.16bn (+6.4% yoy; -2.8% qoq). The sector’s 1H18 core net profit (RM12.5bn) was within our expectations, accounting for 49% of our projection of RM25.4bn (+6.7% yoy) for 2018E. During the quarter, we raised our net earnings forecasts for Hong Leong Bank by 3% for FY19-20E, but revised down our FY19-21E net earnings forecast for Alliance Bank by 7-8% – impact of which, has been immaterial to our earnings forecasts for the sector.

Sector’s Key Driver – Fund-based Income, Lower Provisions

2Q18 fund-based income (+1% yoy; flat qoq) accounted for 75.5% of the banks’ total net income, despite weaker 2Q18 NIM of 2.29% (-6bps yoy, - 3bps qoq) due to repricing of deposit rates. Meanwhile, non-interest income was a little disappointing this quarter largely due to reversal of gains in the market. Lower provisions in 2Q18 was another key driver to much improved earnings on a yoy basis (-30% yoy; +2.3% qoq).

Reaffirm Sector OVERWEIGHT; Our Big-cap Picks: Maybank, CIMB

Reaffirm OVERWEIGHT. We foresee sector core earnings growth of 6.7% yoy in 2018E, followed by a more modest 4.4% yoy in 2019E and 4.0% yoy in 2020E. Our top picks: i) Maybank (MAY MK, RM9.89, BUY; TP: RM12.00 @ 1.74x 2019E P/BV) – operational strength in 1H18 will continue in 2H18 due to loan expansion, NIM management but mitigated by higher provisions; and ii) CIMB Group (CIMB MK, RM5.92, BUY; TP: RM7.50 @ 1.38x CY19E P/BV) – Indonesian unit CIMB Niaga is likely to improve in 2H18 with repricing of rates. Downside risks: new NPL formation, NIM compression, funding cost pressure, weaker loan growth, negative forex impact of overseas asset holdings.

Source: Affin Hwang Research - 12 Sept 2018