YTD, the KLFIN index outperformed the FBMKLCI by 1.2ppts. Essentially, the advance was primarily due to: (i) improved commodity prices; (ii) stronger Ringgit, and (iii) further US interest rate hike probably delayed to end of 2016. All things considered, no re-rating catalysts are in sight as structural and cyclical concerns 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, to continue plaguing the industry. All in, we maintain our NEUTRAL stance on the sector. RHBCAP (RM6.23) and MAYBANK (TP: RM9.33) are the only OUTPERFORMs in our universe, while AFFIN (TP: RM1.80) and CIMB (TP: 4.46) and HLBANK (RM11.39) are the UNDERPERFORMs. The others are MARKET PERFORMs.

Banking stocks recovered slightly in 1Q16. YTD, the KL Finance Index (KLFIN) advanced by 4.2% (2014: +1.7%) and outperformed the FBMKLCI index by 120bps (2014: 70bps), led by AFG (YTD +10.3%), MAYBANK (YTD +8.4%) and CIMB (YTD +6.3%). The strong recovery of both AFG and Maybank is probably attributed to their attractive dividend yields going forward at 4.3% and 5.3%, respectively, (vs. average industry’s yield of 3.8%). CIMB’s surprise performance is probably attributed to improved commodity prices and stronger Ringgit, which allayed fear of its exposure to commodity-related assets.

4Q15 results review and expectations moving forward. Only 2 of the 9 stocks were below expectations (HLBANK and RHBCAP) while the rest met with our expectations. The subpar performance of HLBANK was due to the higher-thanexpected provision for bad loans, whilst for RHBCAP, it was also attributed to higher-than-expected provisions and its one-off Career Transition Scheme (CTS). Notable observations made during the quarter were: (i) lower earnings growth, (ii) improving liquidity position, (iii) NIMs downward pressure increasing, (iv) lower non-interest income, (v) CIR stayed at elevated levels, (vi) asset quality improving, and (vii) lower credit costs. These trends are expected to persist with CIR expected to be on a downtrend, but higher credit costs expected to persist in 2016.

Expectations for FY16/FY17E; (i) aggregate loans growth is expected to weaken to +8.0% for FY16 but inched marginally higher to +8.2% for FY17 (vs. FY15: +9.9%); (ii) sector NIM to contract further by 9bps/10bps (vs. FY15:-7bps); (iii) noninterest income growth to pick up some paces (+4.7%/+11.7% vs. FY15: -1.6%); (iv) credit charge ratio for the sector to increase by 7bps for FY16 but weaken by 1.0bps the following year (vs. FY15: 12bps) to 39bps/38bps; (v) cost-to-income ratio (CIR) to fall by 169bps/124bps (vs. FY15: +165bps) to 49.0%/47.7%, and (vi) earnings to grow marginally by 0.1% in FY16 but surge strongly by 6.7% for FY17 on anticipation on improved metrics as mentioned above. (vs. FY15: -2.1%). For the past six years, the asset quality of the banking industry has been improving; as at Feb-16, we observed that the industry’s gross impaired loans ratio had fallen to a low of 1.64%. With the expected subdued domestic economy and banks restrictive in the lending (as can be seen in declining approval rates), we expect GIL to remain stable at around 1.75% for FY16 (vs. 1.74% for FY15) shedding 3bps to 1.72% for FY17. As asset quality is expected to stabilize, has credit charge peaked? Only Affin and CIMB are expecting a lower credit charge ratio for FY16 while the other banks are expecting higher credit charge. Although the economy is expected to be slower in CY16, the appreciating Ringgit and stronger commodity prices might boost confidence in the economy, prompting banks to lower their loan loss provisions and thus lower credit charge. We see MAYBANK and RHBCAP as likely beneficiaries from such revisions.

Maintain NEUTRAL on the sector. With no let up in the current structural and cyclical concerns 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. Both banks will also benefit from any downward revision of credit charge ratio. The other stocks under our coverage are MARKET PERFORM except for AFFIN, CIMB and HLBANK, which are UNDERPERFORM. 

Source: Kenanga Research - 5 Apr 2016