In 1Q15, out of the 9 banking stocks under our coverage, 7 met expectations (78%) while 2 were below (22%). Notable QoQ trends were: (i) flat earnings growth, (ii) liquidity position remaining tight, (iii) worsening NIM, (iv) capital market environment remains weak, (v) CIR stayed at elevated levels, (vi) asset quality improved, but (vii) credit cost was on the rise. All in, we maintain our NEUTRAL view on the sector as it lacks re-rating catalysts. We have a selective OUTPERFORM call on MAYBANK (TP: RM9.74), while AFFIN (TP: RM2.74) is an UNDERPERFORM and the others are MARKET PERFORMs.

Jan-Mar 2015 results were largely in-line. 7 out of the 9 stocks met expectations (AFG, AMBANK, BIMB, HLBANK, MAYBANK, PBBANK, RHBCAP) while 2 came in below (AFFIN, CIMB). The subpar performances chalked in by both AFFIN and CIMB were due to higher-than-expected provisions for bad loans. For AFFIN, we gathered that the spike in allowance was one-off in nature but for CIMB, its Indonesian subsidiary is poised to grapple with another round of high provisioning.

Aggregate earnings could have dipped if not for CIMB’s better QoQ performance. Sector earnings for the quarter was relatively flat QoQ as we observed weakness all around (-1% QoQ, -3% YoY). CIMB was the only bank which saw a huge surge in its QoQ profit due to a low base effect (+210% QoQ, -27% YoY). That aside, other banks registered uninspiring numbers attributable to: (i) weak income growth, (ii) rising opex, and (iii) higher credit cost.

Liquidity position still tight. Although aggregate loan-to-deposit ratio (LDR) dipped 60bpts QoQ, we opine that the market’s liquidity position remained tight. We started off the year by observing industry loans and deposits growth of 2-3% QoQ (+11- 12% YoY). To note, current account and savings account (CASA), as a percentage of total deposits was still flattish at 30%.

NIM trend still downward but pressure coming from lower yields. We saw further NIM compression (-7bpts QoQ, - 14bpts YoY), no thanks to lower average lending yield (-15bpts QoQ, +9bpts YoY). To our surprise, cost of funds showed some respite (-8bpts QoQ, +25bpts YoY). We suspect the hype and rush to shore up retail deposit base (to meet Basel III requirements on liquidity coverage and net stable funding ratios) had tapered.

No boost from capital market activities, still weak overall. 1Q15 aggregate non-interest income (NII) fell 4% QoQ (+14% YoY). This time around, MAYBANK was dragged by a weaker showing from its insurance and takaful business (-21% QoQ, +18% YoY). However, CIMB (+15% QoQ, +2% YoY) compensated for MAYBANK’s shortfall as it saw its fee-based revenue increased along higher forex gains as well.

The industry’s cost-to-income ratio (CIR) was still at elevated levels, above the 50%-mark despite banks implementing various initiatives to control costs. Root of the matter, opex was barely brought down (-1% QoQ, +13% YoY) and income contracted (-1% QoQ, +7% YoY). The only bank which saw significant CIR decline was RHBCAP (-5ppts QoQ, +1ppts YoY).

Asset quality improved across the board, except for AFFIN, BIMB and CIMB. Pressure came from both the household and business segment. Their gross impaired loans (GIL) ratio increased by 5-14bpts QoQ (+2-11bpts YoY) vs. industry’s GIL, which fell 2bpts QoQ (-10bpts YoY).

Industry’s credit cost on the rise. Aggregate credit charge ratio inched up higher by 4bpts QoQ (+12bpts YoY) as most banks saw their loans loss provision ballooned, save for AFG, AMBANK, and CIMB. This confirms our earlier view that there will be an up-cycle in credit cost since most bad legacy business loans were already restructured or recovered.

Nothing peculiar on banks’ capital position. The likes of CIMB, HLBANK, MAYBANK, PBBANK and RHBCAP saw their common equity tier 1 (CET1) ratio declining by 20-90bpts QoQ mainly due to dividend payouts. However, for BIMB, it was attributable to higher credit and market risk-weighted assets. Otherwise, CET1 ratio would have improved across the board.

Maintain NEUTRAL on the sector. Faced with structural and cyclical headwinds such as: (i) muted loans growth, (ii) tight liquidity environment, (iii) narrowing NIM, (iv) weak capital market activities, as well as (v) rising credit costs, we continue to be NEUTRAL on the banking sector. Hence, we advocate caution and adopt a selective stock picking strategy; MAYBANK (TP: RM9.74) remains the lone OUTPERFORM in our universe. Essentially, we like its: (i) superior yield offerings of ~6% and (ii) extensive regional exposure in ASEAN-5. The other stocks under our coverage are MARKET PERFORMs, save for AFFIN (TP: RM2.74) which is an UNDERPERFORM.

Source: Kenanga Research - 2 Jun 2015