For 2QCY16, six (6) out of nine (9) banking stocks under our coverage met our expectations (67%) with only one (1) below. The usual trends were there for the quarter under review; (i) lower earnings growth, (ii) slight deterioration of liquidity position, (iii) no let-up on NIMs compression, (iv) NOII improved, (v) CIR continued to improve, (vi) asset quality continued to deteriorate, and (vii) credit costs still elevated. All in, we maintain our NEUTRAL stance on the sector as the prevailing challenges in the economy still remain. As results were mostly in line, we revised downwards our calls for some of the banking stocks under our coverage. We downgrade our call for CIMB (TP: RM4.87) to MARKET PERFORM as its share price is adhering to our valuations while AFFIN (TP: RM2.04) is downgraded to s UDER PERFORM (from MARKET PERFORM) due to its potential weak returns. The rest are maintained at MARKET PERFORM.

April-June 2016 results largely in line. Only 1 of the 9 stocks was below expectations (MAYBANK) while 6 met with our expectations with 2 (AFFIN & HLBANK) above. The subpar performance of MAYBANK was due to higher impairment allowances while the outperformance of AFFIN and HLBANK was due to lower-than-expected credit costs.

Aggregate earnings declined, dragged by fall in heavyweights. Sector earnings declined on QoQ and YoY basis, at 5% and 3.1%%, respectively (1Q16: -2.5% QoQ and -1.0% YoY). On a QoQ basis, all the banking stocks in our universe registered positive growth with the exception of Maybank and RHBBANK which earnings were dragged by higher allowances for impairments.

Liquidity position reversing its trend. Loan growth was mixed, which rebounded QoQ by +1.8% in 2QCY16 but continues to decelerate YoY by +5.9% (1Q16: -1.4% QoQ and +6.6% YoY). Industry deposit growth improved both QoQ and YoY at +1.4% and +6.4%, respectively (1Q16: 0.0% QoQ and +6.1% YoY). As loan outpaced deposits groloan-to-deposit-ratioratio (LDR) improved by 41bps QoQ indicat.wing liquidity slightly. Current account and savings account (CASA), as a percentage of total deposits rose by 50bps to 29.2% with improvement in both QoQ and YoY at +3.1% QoQ (1Q16: -1.1% QoQ) and +4.7% YoY (1Q16: +2.6 YOY). NIMs downward pressure evident. As expected, NIM compressed in 2Q16 at -0.7bps QoQ and -6.5bps YoY (1Q16: -11.0bps QoQ, -6.6 bps YoY) albeit slower. Again, this is due to average lending yield falling faster than average cost of funds as banks strived for improvement in their loan books with lower lending rates.

Non-interest income improvements were mixed. 2QCY16 aggregate non-interest income (NOII) rebounded by 4.3% QoQ and 4.4% YoY (1QCY16: -12.9% QoQ; -4.7% YoY). With the exception of BIMB, MAYBANK and PBBANK, the rest saw healthier NOII, improving between +4% to +26% due to significant growth in insurance, fee income and investment & trading income. Cost-to-income ratio (CIR) continued to improve. Both QoQ and YoY saw CIR falling by 98 and 228 bps, respectively, as opex decelerated sharply (-0.7% QoQ and +0.7 YoY) than income growth (+1.3% QoQ and +5.4% YoY).

Asset quality deteriorated due to Maybank’s and RHBANK’s prudent measures. Overall industry’s asset quality was dragged by higher GIL from both MAYBANK and RHBBANK. Both asset quality was hit by the prudent move to reclassify loans exposed to the O&G sector as impaired despite the loans considered as performing. Asset quality is still challenging for 2H16 (especially those highly who are exposed to the volatile O&G sector) and we expect asset quality to firm up into 2017. Industry’s credit cost slower QoQ. Overall aggregate credit charge increased 3.9bps QoQ and 16.9bps YoY (1QCY16: +7.2bps QoQ, +10.0bps YoY) as most banks’ loan loss provisions rose. We expect credit costs to remain a challenge given the prevailing economic conditions.

Banks’ capital position still above the regulatory mark. Most of the banks saw their common equity tier 1 (CET1) ratio improved except the exception of AFG, AMBANK and PBBANK. Nonetheless, their respective CET1 ratio is still comfortably above the regulatory requirements of 7%.

NEUTRAL all the way. We made no change in our NEUTRAL view for the sector No concrete catalyst and no game changer going forward. Our views on structural and cyclical headwinds such as; (i) moderate economy; (ii) muted loans growth; (iii) constricting liquidity environment; (iv) narrowing NIM; and (v) elevated credit costs, still remains. Hence, there is no change to our cautious stance. With most of the f 2QCY16 results coming in line, we revised our calls for some of the banking stocks under our coverage. We downgrade our OUTPERFORM call for CIMB (TP: RM4.87) to MARKET PERFORM as its share price is adhering to our valuations while AFFIN (TP: RM2.04) is UNDER PERFORM (from MARKET PERFORM) due to its potential weak returns. The rest are maintained at MARKET PERFORM.

Source: Kenanga Research - 8 Sep 2016