The banking sector reported 1Q19 core net profit of RM6.16bn (-2.9% yoy; -8.9% qoq), which was broadly in-line with our expectations. RHB Bank was the outperformer, which saw 1Q19 core net profit up 6.7% yoy and 11.5% qoq, due to lower impaired loan allowances. On the other hand, Maybank, AMMB, Alliance Bank and Hong Leong Bank reported less favourable results on a qoq basis. The banking industry saw an average NIM compression of 7bps yoy while qoq was down 11bps (due to weaker NIM at Maybank, AMMB, RHB). In our view, weak operating income growth as at 1Q19 (-2.1% yoy; -1.5% qoq) are telling signs of moderating times ahead. As we expect a flat core net profit growth in 2019, we maintain sector NEUTRAL.

1Q19 Banking Sector Net Profit Within Our Expectations

The Malaysian banking 1Q19 sector net profit came in at RM6.17bn (-4.7% yoy, -8.4% qoq) while normalized net profit declined by 2.9% yoy and 8.9% qoq. The sector’s core net profit (RM6.16bn) was within our expectations, accounting for 23% of our 2019E banking universe’s net earnings projection of RM25.7bn. Overall, our earnings revisions for 2019E-21E have been minimal. Nonetheless, we do foresee higher downside risks on earnings for Maybank and AMMB, on concerns over higher credit costs.

Sector Drivers – Fund-based Income (at 75% of Total Income)

The key sector earnings driver for 1Q19 was the banks’ strong fund-based income (+1.7% yoy; -1.9% qoq), which accounts for 75% of operating income (-2.1% yoy; -1.5% qoq). This was despite some net interest margin (NIM) pressure of 7bps on a yoy basis while qoq was mixed. Meanwhile, non-interest income (excluding one-off disposal gains) continued to disappoint yoy and qoq due to weak investment income. As the sector’s operating expenses have been flat yoy and qoq, we have not seen much changes in 1Q19’s average cost-to-income ratio (CIR), i.e. at 49%.

Maintain Sector at NEUTRAL

We reaffirm our NEUTRAL rating on the sector, which is trading at a 2019E P/BV multiple of 1.24x vs. the past 10-year average of 1.53x and past 5- year average of 1.35x. Our top picks are: i) Alliance Bank (ABMB MK, RM3.84, BUY, TP: RM4.80 @ 1.12 x CY20E P/BV target), which is in a niche and high margin banking segment; ii) Aeon Credit Service (ACS MK, RM16.42, BUY, TP: RM20.40 @ 13x CY20E P/E target), which is being driven by robust receivables growth. Upside/downside risks: funding cost easing/pressure, stronger/weaker loan growth.

Source: Affin Hwang Research - 10 Jun 2019