For 3Q15, 7 out of 9 banking stocks under our coverage met expectations (78%) and 2 were below (22%). Notable QoQ trends were: (i) lower earnings growth, (ii) narrowing liquidity position, (iii) NIMs pressure easing, (iv) Non-interest income boosted by forex gains (v) CIR stayed at elevated levels, (vi) deteriorating asset quality, and (vii) higher credit cost. All in, we maintain our NEUTRAL view on the sector as it still lacks re-rating catalysts given the prevailing challenging economy. We do however have an OUTPERFORM call on both MAYBANK (TP: RM9.74) and RHBCAP (7.26), 5 MARKET PERFORMs and 2 UNDERPERFORMs.

Jul-Sep 2015 results were mostly in line. 7 out of the 9 stocks met expectations (AFFIN, AFG, AMBANK, BIMB, HLBANK, MAYBANK, PBBANK) while CIMB and RHBCAP came in below expectations. The subpar performances of CIMB were due to higher-than-expected provision for bad loans while higher opex due to the one-off Career Transition Scheme (CTS) dragged the performance of RHBCAP.

Aggregate earnings improve marginally. Sector earnings was marginally higher for QoQ but lower YoY, at +0.7% and -5.4%, respectively, (2Q15: -0.1% QoQ and -0.9% YoY). On a QoQ basis AFG, AMBANK, CIMB, MAYBANK and PBBANK saw better performances with a growth range of 10% to 25% attributed to higher operating income. RHBCAP saw its earnings fell sharply by 64% attributed mainly to the CTS. For the others, decline in numbers were attributed to i) weak income growth; (ii) rising opex and (iii) higher credit cost, all of which were expected.

Liquidity position narrowing. For the 3Q15, loans and deposits growth were around +4.9% and +2.5%, respectively, QoQ (2Q: +2.5 and +1.1% respectively). On a YoY basis, it was at +14.8% (loans) and +11.3% (deposits) vs +12.3% (loans) and +9.5% (deposits) for the 2Q. CIMB and Maybank posted above industry performances (loans: +18-20% YoY, deposits: +14%-18%). The improved loan growth saw aggregate loan-deposit-ratio (LDR) improving by 215 bpts QoQ indicating liquidity position narrowing. To note, current account and savings account (CASA), as a percentage of total deposits was still flattish at 29.7%, hence, net interest margin (NIM) compression is unavoidable.

NIM up but downward pressure is still evident. NIM compression surprisingly eased in 3Q (+9.7bps QoQ, -6.1bps YoY (1Q: -1.2 bps QoQ, -13.7 bps YoY). This is due to a stronger average lending yield for the quarter. We believe this is due to banks obtaining better quality loans and better utilisation of assets (i.e higher loans). However, given that LDR is on the uptrend, (with deposit growth lagging loan growth) competition for deposits will likely increase pushing NIM pressure downwards.

Non-interest income boosted by forex gains. 3Q15 aggregate non-interest income (NII) rebounded +9.3% QoQ and +11.3 YoY (2Q: -5.6%, -0.2% YoY). The surge in NOII due to forex gains attributed to the weaker Ringgit. AFFIN, AFG and RHBCAP saw decline in its NOII attributed to lower fee and trading income whilst for AMBANK it was dragged by lower trading income and drop in its insurance business.

The industry’s cost-to-income ratio (CIR) was still at elevated levels, above the 50%-mark for the fourth straight quarter. QoQ, CIR fell by 92bps but surged by 203 bps YoY. Root of the matter, opex surged to +4.8% QoQ and +13.6% YoY (2Q: +0.5% QoQ and +10.1% YoY) and income improved by 6.7% QoQ, and +9.0% YoY (2Q: -0.3% QoQ and +3.9% YoY). Public Bank still has the best CIR in the industry with CIR down by 123 bps while RHBCAP the worst performing up by 21 ppts to 77.2% % due to the one-off CTS.

Asset quality deteriorated slightly, with the exception for BIMB, HLBANK, MAYBANK, PBBANK and RHBCAP. AFFIN, AFG, AMBANK and CIMB gross impaired loans (GIL) ratio increased by 11-17 bps QoQ (14-30 bps YoY) vs. the industry’s GIL which increased by 2.6bpts QoQ (--5.8bpts YoY). We expect this to stay moderate for the remainder of the year as banks continue to seek out new, creditworthy customers.

Industry’s credit cost rebounded. Aggregate credit charge ratio rebounded by 12.3bps QoQ and +21.4bps YoY (2Q: -3.1 bps QoQ, +9.9bps YoY) as most banks saw their loans loss provision ascended, save for AMBANK, BIMB and CIMB. We believe credit costs will stay elevated given the prevailing economic conditions.

Banks’ capital position regressed. Mostly the banks saw their common equity tier 1 (CET1) ratio of lessened. BIMB, CIMB, HLBANK, MAYBANK, PBBANK and RHBCAP saw their CET1 dipped between 15-110bps QoQ. The drop is due to increase in their risk weighted asset from the previous quarter. Overall the banks’ CET1 ratio is still comfortably above the regulatory requirements of 7%.

Maintain NEUTRAL on the sector. Faced with structural and cyclical headwinds such as: (i) slower loans growth, (ii) narrow liquidity environment, (iii) compressing 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) and RHBCAP (TP: RM7.26) are the OUTPERFORMs in our banking stocks universe. Essentially, for MAYBANK we like its: (i) superior yield offerings of ~7%, and (ii) extensive regional exposure in ASEAN-5. As for RHBCAP we like it for its cheap valuation at 0.8x P/B vs industry average of 1.5x P/B. The other stocks under our coverage are MARKET PERFORMs except for AFFIN and CIMB where we maintained UNDERPERFORM. 

Source: Kenanga Research - 8 Dec 2015