In 4Q14, out of the 9 banking stocks under our coverage, 5 met expectations (56%), 2 above (22%), and 2 below (22%). Notable trends were: (i) weak earnings growth, (ii) liquidity position remains tight, (iii) NIM resumed its downward trend, (iv) capital market environment still weak, (v) cost escalated, (vi) asset quality improved, but (vii) credit cost was on the rise. Thus, we maintain our NEUTRAL stance on the sector as it lacks re-rating catalysts given prevailing structural and cyclical headwinds. We have selective OUTPERFORM recommendations on BIMB (TP: RM4.72) and MAYBANK (TP: RM10.26).

4Q14 results season a mixed bag. Of the 9 banking stocks under our coverage, 5 met expectations (AFG, BIMB, HLBANK, MAYBANK, RHBCAP), 2 above (AFFIN, PBBANK), and 2 below (AMBANK, CIMB). For AFFIN and PBBANK, actual earnings ran ahead of estimates due to higher-than-expected growth in non-interest income. AMBANK, on the other hand, failed to deliver no thanks to a decline in its interest income along with weak income contribution from its Islamic banking unit. Lastly, CIMB disappointed due to a higher-than-expected provision for bad loans.

Aggregate earnings dipped. Due to CIMB’s poor set of results, sector earnings for the quarter fell 6% QoQ (-5% YoY). As explained, CIMB was hit by high loan loss provision for its coal-related portfolio in Indonesia along with a legacy loan in Malaysia. That said, the likes of AFG, AMBANK and RHBCAP also contributed to the fall in aggregate earnings.

Liquidity position remains tight. For the last 3 months of the year, industry loans and deposits grew 5% QoQ while on a YoY basis, both expanded 12% and 9%, respectively. Aggregate loan-to-deposit ratio (LDR) stood above the 90%-mark in 4Q14, suggesting that the market’s liquidity position remains tight. As for current account and savings account (CASA), as a percentage of total deposits, it was still flattish at 30%.

NIM resumed its downward trend. Sector net interest margin (NIM) resumed its downward trend (-8bpts QoQ, -12bpts YoY) during the Oct-Dec period. Essentially, pressure on NIM came from the back of higher cost of funds due to stiff pricebased competition for deposits in the retail space. Furthermore, this was partially fuelled by the need to meet Basel III requirements on liquidity coverage and net stable funding ratios.

Capital market environment was still weak. Although capital market activities remained lethargic, 4Q14’s sector noninterest income rose 12% QoQ (+9% YoY), thanks to MAYBANK. That said, these trends were not apparent in other banks but weak growth and some declines were seen instead.

Cost escalated. We saw an uptick on the industry’s cost-to-income ratio (CIR) (+2ppts QoQ, +3ppts YoY) despite banks championing various initiatives to control costs. Thus to our surprise, most banks saw their CIR rising by 3ppts-8ppts QoQ, save for AFFIN, MAYBANK and PBBANK. That said, we believe stricter cost discipline will be practised in 2015 as banks’ bottom-line growth will be even more dependent than ever on running a tight ship.

Asset quality improved. To recap, CIMB and MAYBANK were the two culprits which pushed up the sector’s gross impaired loans ratio (GIL) back in 3Q14. However, both showed improvement during the Oct-Dec period, thanks to stronger bad loan recoveries coupled with quicker loans growth; we observed that industry’s GIL had fallen by 11bpts QoQ (-14bpts YoY).

Industry’s credit cost on the rise. Aggregate credit charge ratio spiked 8bpts QoQ (+11bpts YoY) and this was no thanks to higher loan loss provisioning by AFG and CIMB. Otherwise, credit cost for the sector would have remained relatively benign on the back of higher bad loans being recouped.

Capital raising exercises in the offing for HLBANK and RHBCAP. Banks’ common equity tier 1 (CET1) ratio improved across the board. That said, however, HLBANK and RHBCAP will be looking to raise capital over the short-term. For HLBANK, we believe it may raise fresh capital of ~RM2.1bn-RM2.2bn to bring its fully loaded CET1 ratio to 11% (Dec-14: 9.2%), while its FY15 ROE could be diluted to 13.7% from 14.4%. Whereas, ~RM1.3bn-RM1.4bn worth of fresh capital could be raised by RHBCAP from the market to help boost its fully loaded CET1 ratio to 11% (Dec-14: 9.8%). This, however, could dilute its FY15 ROE to 9.7% from 10.1%.

Maintain NEUTRAL on the sector. Faced with structural and cyclical headwinds such as: (i) muted loans growth, (ii) narrowing NIM, (iii) weak capital market activities, as well as (iv) rising credit costs, we remain NEUTRAL on the banking sector. All in, we advocate caution and adopt a selective stock picking strategy. We have OUTPERFORM recommendations on BIMB (TP: RM4.72) and MAYBANK (TP: RM10.26). Essentially, we like the two stocks for their decent yield offerings of 5%-6%. The remaining stocks under our coverage are MARKET PERFORM.

Source: Kenanga