For 4QCY15, 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) improving liquidity position, (iii) NIMs pressure increasing, (iv) lower non-interest income, (v) CIR stayed at elevated levels, (vi) asset quality improving, and (vii) higher credit costs. All in, we maintain our NEUTRAL view on the sector as it still faces challenges with the slowing economy. We do, however, have an OUTPERFORM call on both RHBCAP (6.23) and MAYBANK (TP: RM9.33); 4 MARKET PERFORMs and 3 UNDERPERFORMs.

Oct-Dec 2015 results were largely in line. Only 2 of the 9 stocks were below expectations (HLBANK and RHBCAP) while the rest met our expectations. The sub-par performance of HLBANK was due to higher-than-expected provisions for bad loans, whilst for RHBCAP it was also attributed higher-than-expected provisions and the oneoff Career Transition Scheme (CTS).

Aggregate earnings declined as most saw dip in performance. Sector earnings declined on QoQ and YoY basis, at -4.3% and -1.0%, respectively, (3QCY15: +4.4% QoQ and -2.0% YoY). On a QoQ basis, AFG, BIMB, CIMB, and PBBANK saw positive growth of +1% to +35% attributed to higher total income (CIMB), lower impairments allowances (AFG), writebacks (PBBANK) and better financing growth (BIMB).

Liquidity position improving. Industry Loan growth was slower in the 4QCY15 rising by a meagre +0.5% QoQ and +10.4% YoY (3Q15: +4.9% QoQ and +14.9% YoY). All banks saw loans growing above industry’s QoQ performances with the exception of AMBANK, which saw flattish growth and MAYBANK at -1.1 (3Q15: +7.4%). Industry deposit growth was higher (than loans) on a QoQ basis at +2.4% but slower on YoY at +9.0% (3Q15: +2.5% QoQ and +11.3% YoY) with AFFIN, BIMB and MAYBANK performing above the industry average at +9.0%, +8.6% and +3.8% QoQ, respectively. The faster deposit growth saw aggregate loan-deposit-ratio (LDR) dropping by 169 bps QoQ indicating liquidity position is improving.

NIMs downward pressure evident. As expected, NIM compressed in 4Q at -4.0bps QoQ and -2.8 bps YoY (3Q: +9.7 bps QoQ, -6.2 bps YoY). This is due to a stronger average cost of funds for the quarter. Average cost of funds increased by +8.5bps (3Q: -3bps QoQ), whilst average lending yield increased by +3.5bps (3Q: +7.1bps). We believe this is due to banks shoring up their deposits. We believe that the banks will continue to shore up their deposits; thus, competition for deposits will likely to continue exerting downward pressure on their NIMs.

Non-interest income not boosted by forex gains. 4QCY15 aggregate non-interest income (NII) slowed to +1.8% QoQ and +5.4% YoY (3Q15: +14.3% QoQ; 16.3% YoY). AFFIN, BIMB, CIMB, HLBANK and PBBANK saw gains in NOII of between 1% (PBBANK) and 26% (BIMB) attributed mainly to higher fee & commission income, gains from financial instruments and dividend income. Forex gains in 4Q were not so evident in the previous quarter due to lower volatility of the Ringgit.

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. QoQ, CIR rose by 107bps but lower at 18bps YoY despite the trimming of staff by several banks in 2015. Root of the matter, opex surged to +3.0% QoQ and +8.3% YoY (3Q: +4.8% QoQ and +13.6% YoY) but income improved only by +0.8% QoQ, and +7.9% YoY (3Q: +8.1% QoQ and +10.4% YoY). Public Bank still has the best CIR in the industry.

Asset quality improved slightly across the board, but mitigated by higher GIL from HLBANK and MAYBANK. Both saw its gross impaired loans (GIL) ratio increased by 3-22 bps QoQ (-12 to +34 bps YoY) vs. the industry’s GIL which dipped by 1bps QoQ (+4.4bpts YoY). We expect asset quality to stay elevated, but the slowing economy poses challenges. Industry’s credit cost lower. Aggregate credit charge ratio fell by 6.5bps QoQ but rose 6.8bps YoY (3Q: +12.3bps QoQ, +21.4bps YoY) as most banks saw their loans loss provision descended, save for BIMB, CIMB, HLBANK and RHBCAP. We believe credit costs will stay elevated given the prevailing economic conditions.

Banks’ capital position improved. Mostly, the banks saw their common equity tier 1 (CET1) ratio improved with the exception of AFG and RHBCAP. The drop is due to lower retained earnings (AFG) and increase in risk weighted assets (RHBCAP) 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) narrowing 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; RHBCAP (TP: RM6.23) and MAYBANK (TP: RM9.33) are the OUTPERFORMs in our banking stocks universe. We like RHBCAP as we like its cheap valuation at 0.8x P/B vs. industry average of 1.5x P/B which is nearly reaching its lowest point in its 10-year history; hence, we believe the stock price has bottomed out. Essentially, for MAYBANK we like its: extensive regional exposure in ASEAN-5. The other stocks under our coverage are MARKET PERFORMs except for AFFIN, CIMB and HLBANK, which are UNDERPERFORM.

Source: Kenanga Research - 8 Mar 2016