The banking sector reported a 4Q19 core net profit of RM6.9bn (+1.7% yoy; +6.5% qoq), which was broadly in line with our expectations. Maybank was the outperformer in 4Q19, driven by lower provisions qoq and stronger non-interest income yoy. Notable trends during 4Q19 included improved fund-based income growth (yoy and qoq), steady NIM on a sequential basis and a significant increase in provisions yoy (at CIMB and Maybank). Maybank and RHB also proposed higher dividends in 4Q19. Maintain NEUTRAL on the banking sector as we are still cautious on market risks. Nonetheless, we note that valuations look for the Malaysian banking sector looks attractive at 0.98x and 0.94x P/BV for 2020E-21E and dividend yields have also turned compelling (~3%-7%).

Higher Operating Expense and Provisions Negated Operating Income

The banking sector saw a 2019 net operating income growth of 4.4% yoy, underpinned by fund-based income (+2.5% yoy) and non-interest income (+10% yoy; driven by gains on favourable portfolio positions). Nonetheless, this was negated by higher overheads (+5.9% yoy; mainly at CIMB, Maybank and Public Bank) and provisions and impairments (which were altogether 30% higher yoy; mainly at CIMB). Most banks benefited from the normalization in NIM in 2H19, subsequent to the OPR cut in May19. The sector’s NIM saw a contraction of 7bps yoy to 2.13%.

Caution Lies Ahead in 2020; Credit Risk Could be Rising

We are projecting the sector’s core EPS to decline by 4.4% yoy for 2020E but rebound 1.4% yoy in 2021E and 1.3% yoy in 2022E. We expect a decline in 2020E on the negative impact of the 50bps OPR cut, which is likely to lower banks’ fund-based income by circa 2% in 2020E while loan growth is projected at a subdued 3% yoy. We foresee higher credit risk in 2020E should the Covid-19 outbreak prolong, as banks may face the risk of higher default rates especially for loans exposed to the retail, tourism, manufacturing and transportation sectors.

Maintain Sector NEUTRAL

Maintain sector NEUTRAL, though we note that valuations (P/BV and yields ~3%-7%) have turned compelling. Nonetheless, we prefer to stay on the sidelines given uncertainties arising from the Covid-19 outbreak, financial market fallout and slowdown in global growth. On our stock picks, we prefer AMMB (BUY, PT: RM4.80), HL Bank (BUY, PT: RM17.00), AEON Credit (BUY, PT: RM17.20) and ELK-Desa (BUY, PT: RM1.82). We have also upgraded CIMB and Alliance Bank to BUY (from HOLD).

Source: Affin Hwang Research - 10 Mar 2020