Cautious Times Ahead

The banking sector reported a 3Q19 core net profit of RM6.4bn (+1.2% yoy; -3.3% qoq), which was broadly in-line with our expectations. Hong Leong Bank was one of the best performers in our view, seeing improved qoq earnings due to lower impaired-loan allowances and fund-based income; Maybank saw better non-interest income (yoy and qoq), with lower taxation offsetting the negative impact from higher overheads and provisions. Notable trends during 3Q19 include normalization in NIM (+14bps qoq), a sharp 23% yoy improvement in non-interest income, a 12.5% yoy increase in overheads and an increase in provisioning (3Q19 credit cost at 40.8bps vs. 25bps in 3Q18). We have revised our banking sector core earnings forecasts by -1.3%/-3.3%/-3.9% for 2019E/20E/21E. Maintain NEUTRAL. Top picks: AMMB, Aeon Credit and ELK-Desa.

Sector Drivers – Fund-based Income (at 73% of 9M19 Total Income)

The key sector earnings driver for 3Q19 was the banks’ fund-based income (+4.4% yoy; +5.3% qoq), while for 9M19, it was up 2.0% yoy (accounting for 73% of total income). Most banks benefited from a repricing down of deposit rates, as reflected in the recovery of banks’ NIMs (+14bps qoq). Loan growth (including banks’ overseas exposure) remains fairly muted on a year-to-date basis at 2.6%. Strong results from non-interest income (3Q19: +23.4% yoy; +7.8% qoq) was primarily driven by favourable investment gains from the treasury market. Higher operating expenses and provisions were key dampeners to some banks’ results during the quarter, affecting banks such as CIMB, Maybank and AMMB.

A Cautious Outlook in 2020

We are projecting the sector’s core EPS to decline by 1.2% yoy for 2019E and 1.8% yoy in 2020E while staying flat in 2021E. We foresee earnings downside risks such as another round of interest rate cuts, which we expect to be a NIM dampener, while loan growth is expected to remain soft in light of weak consumer sentiment. Credit cost may rise further, driven by a deterioration in asset quality (household, commercial property).

Maintain Sector NEUTRAL

We maintain our sector NEUTRAL call, noting that the business and consumer outlook in 2020 will likely stay cautious. On our stock picks, we prefer AMMB (BUY, PT: RM4.90), AEON Credit (BUY, PT: RM17.20) and ELK-Desa (BUY, PT: RM1.98).

Source: Affin Hwang Research - 10 Dec 2019