We maintain our NEUTRAL stance on the banking sector. We continue to see structural and cyclical headwinds such as: (i) muted loans growth, (ii) narrowing NIM, (iii) weak capital market activities, and (iv) higher credit costs to persist into 2015. That said, we see pockets of opportunities for stock picking among banks which share prices got bashed down severely. For this, we like CIMB (OP; TP: RM6.27). Other OUTPERFORM recommendations are BIMB (TP: RM4.72), MAYBANK (TP: RM10.13), and PBBANK (TP: RM18.89). Essentially, we like the first two for their decent yield offerings of 4%-6% while the third is for its defensive qualities.

Banking stocks took a beating in 2014. To sum it up, this year was a sombre year for banks. YTD, the KL Finance index had fallen sharply by 9.9% and it has underperformed the FBMKLCI index by 2% primarily due to: (i) weak earnings growth, (ii) dilutive capital raising exercises, (iii) poorly received M&A developments along with (iv) dwindling oil prices which spooked sentiment and drove away investors. Essentially, all the banks registered negative share price returns with AFFIN and CIMB being the two biggest losers in this space – their share prices had declined more than 25% YTD.

9M14 results review and expectations for 2015. For 9M14, out of the nine banking stocks under our coverage, earnings disappointment only came from CIMB while BIMB surprised us by declaring a higher dividend payout while the rest met expectations. Poor showing by CIMB was primarily due to headwinds at its Indonesian operations. On the other hand, the higher-than-expected dividend payout by BIMB is in conjunction with its recently proposed dividend reinvestment plan. That said, negative industry trends such as: (i) muted loans growth, (ii) narrowing net interest margin (NIM), (iii) weak capital market activities, and (iv) higher credit cost were seen throughout the year. These are expected to persist into 4Q14 and 2015 as we do not expect any respite for the sector.

Leaner, meaner banks to emerge. In response to all the measures which have negatively hit the sector and in anticipation of a more moderate economic growth (2015 est.: 5.1% vs 2014 est.: 5.8%) moving into 2015, banks have been forced to become leaner and meaner in the ways in which they operate. We are seeing slimmer cost structures (cost-income (CI) ratio of 47.5% in 3QCY14 vs 49.2% in 1QCY13), aggressive competition for deposits (premiums of 15-78bpts offered above board rates), selective lending (away from utilities, finance, transport and manufacturing sectors, in favour of agriculture and property), and diversification away from core segments (i.e. interest income). While these efforts will help cushion the reduced volumes and profitability affecting banks, earnings will still be impacted given the higher cost of living. Hence, downwards pressure on earnings should persist.

Side Note on Falling Oil & Gas Prices. In terms of how the falling oil prices will affect the sector, potential impact on banks is mostly confined to the size of their loan book exposure to oil and gas companies. Upon cursory checks with the local banks, it seems that AFFIN (4.0% of gross loans), AMMB (3.5% of gross loans) and CIMB (3.5% of gross loans) would likely be hit the hardest in consequent to the oil price weakness. Nevertheless, total exposure of the local banking stocks under our coverage is only a small 1.9% and is still manageable.

Cutting numbers across the board. For banks under our coverage, we have decided to err on the conservative side and cut our prior FY14/FY15 earnings estimates across the board by 1%/5%. Our estimates vs. prior forecasts and consensus are outlined in table 5 and 6. Key risks include: (i) slower-than-expected loans growth, (ii) weaker-than-expected NIMs, (iii) unfavourable capital market conditions, and (iv) deterioration in asset quality.

Maintain NEUTRAL on the sector. Faced with structural and cyclical headwinds, we remain NEUTRAL on the banking sector. That said, we see pockets of opportunities for stock picking among banks which share prices got bashed down severely. This is especially suited towards investors with a longer-term horizon where the “fear-led” valuations offer an excellent chance to enter into selected banking stocks. For this, we like CIMB (OP; TP: RM6.27) as we reckon that its risk-toreward ratio now favours on the upside. Other OUTPERFORM recommendations are BIMB (TP: RM4.72), MAYBANK (TP: RM10.13) and PBBANK (TP: RM18.89). Essentially, we like the first two for their decent yield offerings of 4%-6% while the third is for its defensive qualities. Other banking stocks under our coverage are MARKET PERFORMs.

Source: Kenanga