- Four out of seven above expectations.  For the seven local banks that we track closely, four came in above expectations in the June 2012 quarter earnings season. They were AMMB, CIMB, Maybank and RHB Cap.  This was better than the previous three quarters, whereby only two out of seven banks were above expectations in each quarter. 

- Gross loans for the banks under our coverage posted faster expansion of 5.0% QoQ in 2Q12, against a flat 0.9% QoQ rise in 1Q12, with growth mainly in the corporate segment. Net interest income line was also healthier with an expansion rate of 4.6% QoQ, in contrast to the -1.8% QoQ contraction in 1Q12. The sector's net interest margin (NIM) recovered with a +4bps QoQ improvement in 2Q, far better than the decline of 13bps QoQ in 1Q12.

- Non-interest income declines, mainly because of lack of larger investment and trading gains. Non-interest income registered a seemingly weaker quarter, given the -3.6% QoQ decline in 2Q12, compared with a 6.2% QoQ rise in 1Q12. However, this was mainly on the back of slower investment and trading income in 2Q12. The positive news is that the slower investment and trading income was compensated by a pick-up in fee income in 2Q12. 

- Total gross impaired loans for the banks that we track closely improved further by 5.5% QoQ in 2Q12 (1Q12: -6.9% QoQ), taking the sector gross impaired loans ratio to 2.4% in 2Q12 vs. 2.7% in 1Q12. The better impaired loans were attributed to higher recoveries. Sector credit cost was marginally less at 18bps in 2Q12 (1Q12: 20bps).

- Sector net earnings growth higher in 2Q.  The pace of earnings growth was higher at 3.9% QoQ  in 2Q12, above 1Q12's 1.4% QoQ.  With stronger 2Q net earnings, we have now upgraded our sector earnings growth to 6.5% for 2012, from 4.6% three months ago.

- Maintain overweight. 2Q12 provided some relief in terms of net interest margin. While non-interest income came in softer QoQ, we do not foresee any major disappointment given that this was on the back of strong investment and trading income in 1Q. The slower 2Q investment and trading income was partly compensated by a stronger fee income in 2Q. Overall, revenue growth was much healthier in 2Q, while asset quality turned out to be better.  We maintain Overweight with our buys being CIMB, PBB and RHB Cap.