Apart from RHBCAP (MP, TP: RM9.20), which was dragged down by its higher than expected loan loss charges, most of the banking stocks under our coverage reported 2Q results that were pretty much within expectations despite the continuous concern over the trends of: (i) margin squeeze and (ii) a slowdown in loan demand due to the tighter lending rules and higher household debts. In fact, all our picks for the sector for 2Q2013 centering on our three key themes have outperformed in the quarter. Our laggard recommendation – AMMB (OP, TP: RM7.90) saw its share price rising +12% till May and outperformed in the month. It is now trading at the mean point of its historical PER band as well as its P/BV band. Our defensive play – MAYBANK’s (OP, TP: RM10.90) share price has also risen +17% till May. Its domestic-driven model offers earnings visibility to investors and we like its 5.7% dividend yield. Meanwhile, our dark horse pick – AFFIN’s (OP, TP: RM5.20) share price has risen +20% till May. The stock has outperformed as it benefited from the continuous improvements in its asset quality and earnings growth and has become a beta play.  We have rolled forward our valuation base year to FY14 and adjusted upwards our target prices accordingly. Our thematic plays and top picks within the banking sector remained as mentioned above and we continue to maintain our OVERWEIGHT rating on the Banking sector, where further market weakness will be a good entry point.

The 1Q13 results trend and outlook saw the banking  sector posting a flat QoQ growth in  earnings (+0.1%) with the underlying profit growth momentum having clearly stalled. Going forward, there are limited opportunities to drive the sector earnings growth materially beyond our current expectation of a high single digit growth for 2013 given the ongoing margin headwinds and limited credit charged surprises as guided by most bank managements. The 1Q13 results were also somewhat uninspiring for the market. Noninterest incomes growth was strong (+10.1% QoQ) due to the one-off RM515m gains from the sales of CIMB Aviva.  We expect a stronger trading condition in 2Q to persist in the short term with the removal of the election risk factor in the market. Net interest margins will still see signs of softness given that there was no interest rate hike in the short term (-4bps QoQ on average). We believe that bank’s margins will continue to face a modest headwind in 2013. The credit demand was strong (10% on average vis-à-vis the nominal GDP growth of 5.0%), however, despite the weak external outlook. Going forward, we are forecasting just a 9-10% credit growth, to be driven by ETP-related projects.  Provisioning on new impaired assets has also fallen resulting in a lower credit charge.  

Earnings growth is limited.  Given our view that the responsible finance policy  of the Central Bank will promote a healthier household lending portfolio, the momentum of the loan growth will be lower in 2012-2013 and hence, our base case for the system loan growth is expected in a range of 9%-10%. Together with the ongoing margin squeeze headwinds and tailwinds in low provisioning, there are limited opportunities to drive the earnings growth for banks from here materially beyond our current expectation of a high single digit growth only. With earnings growth in the range of high single-digit to low teens together with the already stretched valuations, we believe thus that a rise in the valuation multiple is also unlikely for the sector. However, the laggards and small banks’ valuations are still trading at reasonable levels and as such, we still see some upside on some of the valuations like for AFFIN and AMMB. 

M&A update on BIMB.  We believe that there is a possibility of potential corporate actions by BIMB management to unlock the stock’s value. Recently, BIMB announced that it had started talks to buy Tabung Haji's 18.5% stake in Bank Islam.  BIMB owns 51 per cent of Bank Islam with the remaining 30.5% stake held by Dubai Financial Group (DFG).  BIMB has already begun discussions with DFG to acquire its 30.5% interest in Bank Islam and has till the end of June to announce the result of the discussions. BIMB is also searching for a better proposal to unlock its value with the possibility of Bank Islam potentially assuming BIMB’s listing status.  We rate BIMB a OUTPERFORM with an unchanged TP of RM4.10. 

Source: Kenanga