For the whole of 2015, KLFIN underperformed the FBMKLCI by 5.9ppts. Essentially, the lagging market was primarily due to: (i) growing fear of economic downturn; (ii) weakening Ringgit; and (iii) an uninspiring reporting season. All things considered, the banking sector still lacks re-rating catalysts; structural and cyclical headwinds such as: (i) moderate economy; (ii) muted loans growth; (iii) constricting liquidity environment; (iv) narrowing NIM; (v) weak capital market activities; as well as (vi) rising credit cost plaguing the industry. All in, we maintain our NEUTRAL stance on the sector. MAYBANK (TP: RM9.74) and RHBCAP are the only OUTPERFORMs in our universe, while AFFIN (TP: RM2.17) and CIMB (TP: 4.06) are the UNDERPERFORMs. The others are MARKET PERFORMs.

Banking stocks continue to underperform in 2015. Both the KL Finance index (KLFIN) and FBMKLCI extended their fall by -9.8% and -3.9%respectively (CY14: - 7.4% and -5.7%). Essentially, the fallout for the KLFIN was due to: (i) growing fear of economic downturn; (ii) weakening Ringgit; and (iii) an uninspiring reporting season. All the 9 banking stocks in our banking universe (except Public Bank) saw negative returns with AFG and AMBANK the worst performing at -24% and -31%, respectively.

3Q15 results review. Jul-Sep 2015 results were largely in line. 7 out of 9 banking stocks under our coverage met expectations (78%) and 2 (CIMB and RHBCAP) were below (22%). The sub-par performance of CIMB was due to higher-than-expected provision for bad loans. Meanwhile, higher opex due to the one-off Career Transition Scheme (CTS) dragged the performance of RHBCAP. 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) slight deteriorating asset quality; and (vii) higher credit cost.

Expectations for FY15/FY16: (i) aggregate loans growth is expected to weaken to +8.6%/+8.4% (vs. FY14: +11.9%); (ii) sector NIM to contract further by -15.7bps/-1.1bps (vs. FY14:-18.3bps); (iii) non-interest income growth to pick up some paces (+1.8%/+4.0% vs. FY14: -2.6%); (iv) credit charge ratio for the sector to increase by 14.4bps/1.0bps (vs. FY14: -0.3bpts) to 34bps/35bps; (v) cost-to-income ratio (CIR) to fall by 45.8bps/-17.4bps (vs. FY14: +18.4bpts) to 48.6%/48.4%; and (vi) earnings growth for the sector to dip by 0.3% in FY15 but bounced by +7.4% for FY16 due to lower base (vs. FY14: +0.4%).

Asset quality to stabilize. Thanks to prudent lending behaviour, banks’ impaired loans have not been growing for the past six years. In fact, it has been on a downward trajectory. Both business and household (HH) segments showed similar pattern heading south and are below the Global Financial Crisis level. With the domestic economy expected to moderate and banks very restrictive in lending (as can be seen in declining approval rates), we expect Gross Impaired Loans Ratio (GIL) to remain stable at around 1.70% for 2016 (vs. 1.69% for FY15 & FY14 on average).

Maintain NEUTRAL. We are still NEUTRAL on the sector. No change in our views on structural and cyclical headwinds such as: (i) moderate economy; (ii) muted loans growth; (iii) narrowing NIM; (iv) weak capital market activities; and (v) higher credit costs plaguing the banking industry. Furthermore, there are no concrete catalysts and no game changer going forward. Hence, there is no change in our cautious stance and selective stock picking strategy. MAYBANK (TP: RM9.74) and RHBCAP (TP: RM7.26) are the OUTPERFORM stocks under our coverage. We like Maybank for its superior yield offerings of ~7% while we see deep value in RHBCAP with its Fwd. PBV merely trading at 0.7x compared to the industry’s Fwd. PBV of 1.5x. The other stocks under our coverage are MARKET PERFORMs, save for AFFIN (TP: RM2.17), and CIMB (TP: RM4.06), which are UNDERPERFORMs.

Banks continue to underperform. Not letup for Banking stocks in 2015 as the stocks continued to underperform, with the KL Finance Index (KLFIN) underperforming the FBMKLCI by -5.9%. Essentially, the negativity was due to: (i) growing fear of economic downturn; (ii) weakening Ringgit; and (iii) an uninspiring reporting season. All the 9 banking stocks in our banking universe (except Public Bank) saw negative returns with AFG and AMBANK the worst performing at -24% and -31%, respectively. Collectively, both of the banks’ results were among the worst so far with: (i) earnings falling between 14 to 25% YoY (industry: +0.7% YoY) ); (ii) net interest income down between 4 to 16% YoY (industry: +6.8% YoY), net interest income tumbled between 20 to 22% YoY (industry: +11.3% YoY) and net interest margin plunged by between 17 to 41% YoY (industry: -6.1% YoY). PBBANK is the only positive performer so far at +1.2% YoY due to its defensive nature. Overall the industry still lacks any game changer as the challenging economy still prevails going into 2016. 

Source: Kenanga Research - 8 Jan 2016