Hits and Misses: Of the 9 stocks under our coverage, 6 met our expectations (AFG, BIMB, HLBANK, MAYBANK, PBBANK, RHBCAP), while 3 fell short (AMBANK, AFFIN, CIMB). Those that missed expectations were mainly affected by (i) lower non-interest income and (ii) higher operating expenses. During the quarter, we revised downwards the earnings forecasts of AFG, AFFIN, AMMB and CIMB by 5%-15%.

Net profit. It was an uninspiring quarter for banks, save for BIMB, HLBANK and RHBCAP. Key dampeners to bottom-line were: (i) weak non-interest income contribution and (ii) high operating expenses. In the case of BIMB, the significant uplift to earnings (+86% YoY) was due to lower minority interest recognition, as it acquired the remaining 49% stake of its subsidiary, Bank Islam. RHBCAP, on the hand, saw its earnings growth (+36% YoY) boosted by a large impairment write-back. While for HLBANK, its commendable performance (+29% YoY) came on the back of: (i) lower opex and (ii) higher share of profit contribution from Bank of Chengdu, its 20% associate company.

Net interest income. Generally, most of the banks saw decent net interest income (NII) growth except for AMBANK (-12% YoY). We understand that this was due to a decline in interest income as a result of a shift to a low yielding loans portfolio mix from autofinancing to mortgage and wholesale segments.

Net interest margin. Apart from BIMB and CIMB, the net interest margin (NIM) reported by banks continued to slide given stiff price-based competition for loans and deposits. This quarter, NIM was blemished at both fronts where lending yield declined (-2bpts YoY) while cost of funds increased (+2bpts YoY).

Islamic banking. Overall net income from Islamic banking was fairly muted. Notably, AMBANK’s Islamic banking business saw a decline (-12% YoY) because it posted a higher allowance for impairment on its financing and advances.

Non-interest income. Across the board, we observed that there was a significant slowdown in non-interest income (NOII). However, AFFIN (+78% YoY) and AMBANK (+97%) posted positive growth as the former completed the acquisition of Hwang-DBS businesses while the latter registered a one-off divestment gain from AmLife & AmFamily Tafakul.

Cost efficiency. PBBANK continued to stay way ahead of the pack with a cost-to-income (CI) ratio of 31.7% at 30 June 2014. This is a massive 11.0ppt and 17.2ppts below AMBANK (42.7%) in second place and the industry average (48.9%), respectively.

Liquidity. There were 2 outliers in 2QCY14, AMBANK and BIMB. AMBANK registered a loan-todeposit (LD) ratio of >100% which means that sequential loans growth in the coming quarters will effectively be funded by (more expensive) debt unless they aggressively increase rates to secure deposits. In any case, this will result in additional downward pressure on NIM. BIMB, on the other hand, was the only bank that recorded a LD ratio below industry's 81.4%. At 70.5%, the Group lagged the industry by 10.9ppts. While this means that it has the greatest potential to grow its loans, it would also suggests inefficiency in asset employment.

Asset quality. There is still no contest to PBBANK's asset quality. The Group's gross impaired loans (GIL) ratio at 30 June 2014 was less than half of industry's (1.78%) at a mere 0.65%. The next best would be BIMB's 1.15%, followed closely by HLBANK at 1.18%.  In terms of loan loss coverage, BIMB was best at 179.5%, while second and third were HLBANK (128.9%) and AMBANK (120.5%). Four of the nine banks in our stock universe had loan loss coverage ratios <100%. They are RHBCAP (66.7%), AFFIN (75.3%), CIMB (79.2%) and AFG (90.2%).

Capital adequacy. Compared to the 2019 total capital requirement of 8%, all banks were more than adequately capitalised. MAYBANK had the highest total capital ratio, double the requirement at 16.2%. Meanwhile, AMBANK (15.8%) and HLBANK (14.6%) were the next most capitalised banks.

Recommendation: We maintain our NEUTRAL recommendation on the Banking Sector as we believe that it lacks re-rating catalysts over the near-term. Having said that, we are still bullish on MAYBANK (TP: RM11.20) and RHBCAP (TP: RM10.00) as we opine that the former is a value buy while the latter is premised on rising market sentiment on M&A play.

Source: Kenanga