- HLBB and Maybank came in above expectations.  Among the local banks that we track closely, the two main ones which managed to come in above expectations were HLBB and Maybank. 

- Sector net earnings growth was stronger. Sector net earnings growth reaccelerated on QoQ basis by 3.6% in 1Q12 following a flat performance of +1.4% QoQ in 4Q11.  The stronger net earnings came largely from much lower-thanexpected loan loss provision.  

- Lending revenue slower. Gross loans for the banks under our coverage registered flat growth of 0.9% QoQ in 1Q12, compared to 3.0% QoQ in 4Q11. This was partly due to the new Responsible Lending Guideline which was implemented from 1 January 2012 and which has since affected consumer-related loans. 

- NIM declined in 1Q12.  The sector's net interest margin (NIM) recorded a decline of 13bps on QoQ basis in 1Q12. However, we would remind that 1Q is a historically slower quarter for NIM, given that this is the shortest working quarter in a calendar year. As a gauge, NIM dropped by 18bps in the previous year's 1Q11 while two years ago in 1Q10, NIM decline was -9bps (1Q09: -6bps QoQ, 1Q08: -8bps QoQ).

- New impaired loans has continued to decline for second consecutive quarter. In terms of new impaired loans, this has continued to improve for the second quarter with a -3.2% QoQ drop in 1Q12 (4Q11: -15.9% QoQ). This is positive considering an uptick of 19.2% QoQ in 3Q11. Absolute level impaired loans for the banks that we track  closely has improved further, recording a decline of 6.9% QoQ in 1Q12, (4Q11: -5.7% QoQ), which is reassuring. Gross impaired loans ratio for average of the banks that we track has now been reduced further to 2.7% in 1Q12 from 2.9% in 4Q11.

- Maintain overweight. The 1Q12 net earnings is generally soft, but in line with historical trend. Loans growth was slow, below earlier indicated internal budgets by banks, but in line with our estimates. The weak spot in 1Q12 was net interest margin. However, this was offset by much lower credit costs. Impaired loans has turned out to be better than we expected given continuing improvement, while sector credit costs is also much lower at 20bps, compared to our forecast of 54bps for 2012. Our sector calendarised sector earnings growth is now 4.6% for 2012. Consensus has slightly higher growth rate of 6.3% YoY for calendarised 2012. We maintain overweight with our buys being AFG, HLBB, Maybank, PBB and RHB Cap.