The banking sector reported 3Q18 core net profit of RM6.37bn, up +1.3% yoy and was a rebound of 3.3% qoq. We saw more positives in 3Q18 vs. 2Q18, even though non-interest income continued to decline qoq and yoy. Fund-based income sustained a marginal growth yoy and qoq (+1.6% yoy). NIM pressure eased as well on a qoq basis, though for some banks, the pressure mounted. Provisions for most banks were gradually inching up qoq in 3Q18 (except for Maybank), with the 9M18 trend down 21% yoy. In our recent market strategy, we have downgraded the banking sector from OVERWEIGHT to NEUTRAL, due to rising headwinds.

3Q18 and 9M18 Banking Sector Net Profit Within Our Expectations

The Malaysian banking 3Q18 sector net profits came in at RM6.4bn (+3.5% yoy, -9.2% qoq) while normalized net profit grew by +1.3% yoy and +3.3% qoq (excluding disposal gains). The sector’s 9M18 core net profit (RM20.0bn) was within our expectations, accounting for 75.7% of our 2018E banking universe’s net earnings projection of RM26bn (prior to a -3.1% revision). We have adjusted down our earnings forecasts for Hong Leong Bank (-9.1% for CY2018E) and Public Bank (-3.2% CY2018E) during the reporting period while our forecasts and rating for RHB Bank has been upgraded to BUY. Both CIMB and Maybank’s EPS forecasts were revised down before the 3Q18 results announcement.

Sector’s Drivers – Sustained Fund-based Income

The sector’s drivers for 3Q18 was no different from 2Q18, underpinned by 3Q18 fund-based income (+1.6% yoy; +1.5% qoq) as sequential NIM pressure eased, though the average 9M18 NIM was down about 2bps yoy to 2.28%. Meanwhile, non-interest income continued to disappoint yoy and qoq due to weak investment results. On provisions, the 9M18 provisioning trend continued to improve, down 21% yoy.

Maintain Sector at NEUTRAL

We reaffirm our NEUTRAL rating on the sector, which is trading at a 2019E P/BV multiple of 1.3x vs. the past 10-year average of 1.52x and past 5-year average of 1.4x. Our top picks are: i) Maybank (MAY MK, RM9.40, BUY, TP: RM11.20 based on a 1.6x 2019E target P/BV), which remains an aggressive player in the banking and capital markets; ii) Aeon Credit Service (ACS MK, RM15.52, BUY, TP: RM18.40 based on a 13x CY19E target P/E), whereby we are more positive on its outlook driven by firmer receivables yield and value-chain transformation initiatives. Upside/downside risks: funding cost easing/pressure, stronger/weaker loan growth.

3Q18 and 9M18 banking sector net profit within our expectations

The Malaysian banking 3Q18 sector net profits came in at RM6.4bn (+3.5% yoy, -9.2% qoq) while normalized net profit grew by +1.3% yoy and +3.3% qoq (excluding disposal gains at Hong Leong Bank and CIMB Group). The sector’s 9M18 core net profit (RM20.0bn) was within our expectations, accounting for 75.7% of our 2018E banking universe’s net earnings projection of RM26bn (prior to a -2.2% revision).

Adjustments in Earnings Forecasts and Rating Changes in 3Q18

During the quarter, we have adjusted down our earnings forecasts for Hong Leong Bank (-1%/-7.5%/-5.7% for CY2018E/19E/20E, taking into account the impact of higher funding costs and a divestment gain of RM72.2m booked in 3QCY18. Rating downgraded from BUY to HOLD) and Public Bank (-3.2%/- 6.3%/-6.4% for CY2018E/19E/20E, as we revised down NIM and loan growth assumptions. Rating downgraded from BUY to HOLD) during the reporting period. Meanwhile. our forecasts for RHB Bank has been raised by +6.2%/+6.9%/+6.8% for 2018E/19E/20E, as we factor in lower net credit cost assumptions of 25bps from 35bps while rating was upgraded to BUY (from HOLD).

CIMB Group and Maybank – a Little Cautious on Their Outlook

Both CIMB and Maybank’s EPS forecasts have been revised down by 1.2- 6.2% and 1.5%-5.2% respectively for FY18E-20E before the 3Q18 results announcement. During this period we have downgraded CIMB Group from BUY to HOLD (Price Target RM6.10 based on a 1.14x CY19E target P/BV), citing a less upbeat earnings outlook due to a weaker operating outlook in Indonesia, driven by rising funding pressure and slower loan growth. For Maybank (BUY, Price Target RM11.20 based on 1.6x 2019E target P/BV), it is expected to face a more challenging 2H18, in anticipation of its high funding cost, potentially higher provisions (likely in 2019) and slower corporate and commercial lending activities, though supported by its resilient consumer financial services division.

Overall banking sector universe earnings adjustments at -2.2% to -3.8%

All in all, the net impact from these net profit revisions for our banking sector universe was -2.2%/-3.8%/-3.1% for 2018E/19E/20E.

Core net profit forecasts: 3.9% in 2018E, 3.1% in 2019E, 4.7% in 2020E

Post-revisions, we are forecasting a +3.9% yoy growth in the sector’s 2018E core net profit, +3.1% yoy growth in 2019E and a 4.7% yoy growth in 2020E. The core net profit estimates have excluded the asset disposal gains at CIMB (totalling RM1.13bn from the sale of a 50% stake in CIMB Securities International and reduction of its stakes in CIMB-Principal Asset Management and CIMB-Principal Islamic Asset Management), as well as HLB’s RM72.2m profit from the sale of its 37% stake in a consumer credit JV company with the Bank of Chengdu) and non-recurring expenditures (at AMMB and Alliance). On a core EPS growth basis: 2018E +0.9% yoy; 2019E +1.1% yoy; 2020E +2.7% yoy.

Meanwhile, based on reported headline net profit, our forecasts are: 2018E growth at +8.1% yoy, 2019E at -1.2% yoy and 2020E at +4.7% yoy (on an EPS growth basis: 2018E +3.3% yoy; 2019E -1.0% yoy; 2020E +2.1% yoy).

Details of each banks’ 3Q18 quarterly net profit and core net profit as well as our universe earnings forecasts are laid out in Fig 2-7.

Source: Affin Hwang Research - 10 Dec 2018