Our earlier expectations of: (i) moderating loans growth, (ii) continuous compression in NIM and (iii) normalisation in credit cost, seem to be the norm in recent results reporting season. Going forward, we expect these three underlying trends to continue at least for another few more quarters. We are maintaining our NEUTRAL call on the sector despite decent valuations. The sector is trading at c.13.3x to its FY14 numbers as compared to FBMKLCI’s 17.3x. Our MARKET PERFORM calls on AFFIN (TP: RM4.60), AMBANK (TP: RM8.10), CIMB (TP: RM8.00), HLBANK (TP: RM15.20), and PBBANK (TP: RM20.75) remain unchanged. We have upgraded AFG (TP: RM5.62) and BIMB (TP: RM4.55) to OUTPERFORM post results after their share prices corrected substantially. On the contrary, we have downgraded MAYBANK (MP, TP: RM10.40) post results. We continue to see value in RHBCAP (OP, TP: RM8.75) and BIMB, to a certain extent, as per our PBV/ROE-Regression Study.

4QCY13 results were pretty much within expectations with the exception of BIMB. During the results reporting season, there were some concerns over the revised guidelines and rulings dealing with Mudharabah and Wadiah deposits following a below-than-expected BIMB’s results that was hit by higher effective tax rate. In a nutshell, the new rulings have caused cost of deposits funding higher and more restrictive in attracting depositors. Hence, net profit rate would see a sharp decline which was seen in HLBANK and BIMB. Nonetheless, we have factored in (i) narrower net profit rate, (ii) slower growth in Mudharabah and Wadiah deposits and hence (iii) slower growth in Islamic financing growth into our earnings model. As such, we are not overly concern over the implementation of these new rulings. In fact, we have upgraded BIMB’s rating to OP (from MP previously) after a strong knee-jerk sell-down. Subsequently, the stock recovered and has gone up >10% since our upgrade.

During the quarter, banks have also been told to meet the minimum collective assessment allowance (CA) plus regulatory reserve ratio of 1.2%, as a percentage of gross loans net of government loans and individual allowance (IA), by end-2015. This requirement sends a strong signal to the industry to improve its standards of prudence. Based on our calculations, we believe most banks are able to meet this requirement (see Figure 1) despite the fact that PBBANK, AFFIIN, AFG, MAYBANK and RHBCAP have relatively lower CA. However, risk of increase in credit charged-off rate is still high for CIMB and RHBCAP as these two banking groups are sub-par in impaired loans ratio and loan loss reserve coverage (see Figure 2).

The sector thus far… However, we did not see much improvement in ETP-related loans and lending directions for most of the banks which remain mixed. In general, we notice that banks have started to diversify their lending directions from the traditional household lending (mortgage and hire purchase) and SME to other segments such as share financing and corporate loans for better growth and asset yield, however, risk profile for such loans could be higher (AMBANK for instance, see Figure 3) and tenure for such loans could be shorter as well. This could eventually translate into (i) deterioration in asset quality and (ii) less sustainable trend in loans growth.

As of end-Feb14, the industry outstanding loans grew 10.7% YoY, which is inline with our expectations. Recall that our regression study suggests that the industry loan growth is likely to register between 10% and 12% with a 2014 real GDP growth assumption of 5.0%-5.5%. Household loans remained as the major growth driver with a YoY growth of 11.8% and accounted for 56.5% of the total loan. Despite tighter administrative measures on residential property financing (accounted for 50.2% of household loan or 28.4% of total loan), this sub-segment still grew 13.5% YoY. This is a pleasant surprise to us, but it is inline with the recovery in Approval Rate (AR=Loans Approved/Loans Applied). As of end-Nov13, recall that, the AR has dipped to 45.0% (with a multi-year low of 41.3% in October 2013) from 49.5% a year ago. In the latest set of Banking Sector Statistics, the AR has improved to 51.2% albeit lower than the high in Jan14 of

59.2%. Another high growth segment is lending for purchase of securities which grew 22.7%. However, this type of loan only accounted for 5.8% of total loan. On the contrary, its next largest household loan (accounted for 12.2% of total and 21.5% of household loans), passenger car loans, only grew moderately by 5.5% YoY. We were not surprised over such lacklustre growth. Recall that in our latest Sector Update Report Dated 22/01/14, we have highlighted our concern over the growth prospect and asset quality of auto loans in the long-run. This is because the National Auto Policy (NAP) aims to lower car prices by 20%-30% in the next 5 years. While car prices are expected to decline gradually in the next five years, the price adjustments in used cars could be faster-than-expected due to the longer tenure of auto loan, which is over five years, collateral value could deteriorate at a quicker pace over time. Coupled with the newly proposed Reference Rate Framework (RRF), we reckon that auto loans should be priced at a higher rate under the spirit of risk-based pricing.

Source: Kenanga