No change to our NEUTRAL call for the sector as on-going challenges prevail. Despite 2QCY16 results largely in line, average earnings fell by 5% due to higher impairment allowances. We see no change in our views on the structural and cyclical headwinds such as; (i) moderate economy, (ii) moderate loans growth, (iii) constricting liquidity environment, (iv) narrowing NIM, (v) weak capital market activities, and (vi) high credit costs, plaguing the banking industry. Thus, we have revised down our FY16E/FY17E earnings estimates. Furthermore, the sector lacks concrete catalysts and/or any game changers going forward. We see moderate loans growth of 7% ahead for the banks under our coverage; hence, no change to our cautious stance. We have OUTPERFORM calls for RHBBANK and MAYBANK as their valuations look attractive due to the recent sharp corrections in their share prices. The rest of the banking stocks under our coverage are MARKET PERFORMs except for AFFIN, which is an UNDERPERFORM.

2QCY16 results largely in line, but environment remains unchanged. Only MAYBANK failed to meet expectations with 2 above (AFFIN & MAYBANK). The sub-par performance of MAYBANK was due to higher impairment allowances while the out-performances of AFFIN and HLBANK were due to lower-than-expected credit costs. 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 continues to deteriorate, and (vii) credit costs still elevated. As such, we have toned down our FY16/FY17 estimates for AFFIN, MAYBANK and RHBBANK after making a few adjustments on higher credit costs and slower loans growth while maintaining our estimates for the rest.

Expectations for FY16E/FY17E; (i) aggregate loans growth is expected to weaken to +6.6%/+7.1% (vs. FY15: +10.4%); (ii) sector NIMs to contract further by 10bps/1bps (vs. FY15:-5.5bps), (iii) non-interest income growth falling 3.8% for FY16 but is expected to rebound 7.4% in FY17 (vs. FY15: +9.3%), (iv) credit charge ratio for the sector to increase by 7.2bps for FY16 but weaken by 3.0bps the following year (vs. FY15: 12bps) to 39bps/36bps, (v) cost-to-income ratio (CIR) to fall by 6bps/142bps (vs. FY15: +112bps) to 50.1%/48.6%, and (vi) earnings to fall by 3.3% in FY16 (vs. FY15: -1.9%) but surge strongly by 9.6% in FY17 on anticipation on improved metrics as mentioned above.

Neutral for Budget 2017 but some banks might see some run-up with the coming GE14. We do not see any impact from the coming Budget 2017 for banks but non-bank money lenders, on the other hand, could see short-term spikes in their receivables or loans in the event that more “free money”, such as “Bantuan Rakyat 1 Malaysia” (BR1M), is handed out. In this respect, impact on non-bank money lenders should lean towards neutral-positive. Looking ahead into GE14, we see potential run-up for AMBANK, CIMB and RHBBANK which PBV valuations (0.8x – 0.9x) are below the industry average. In GE 13, we saw several banking stocks surging by double digits in the 12 months leading to the election attributed to the banking stocks trading closer to the industry’s average PBV of 1.8x.

NEUTRAL stance maintained. With loans growth for 2016 expected to be within our expectations of 5-6%, we maintain our NEUTRAL call for the sector. We do not see any change in structural and cyclical headwinds such as: ii) moderate loans growth, (iii) constricting liquidity environment, (iv) narrowing NIM, (v) weak capital market activities, and (v) higher credit costs, are expected to continue plague the banking industry well into 2017.

We have MARKET PERFORM calls for most of the banking stocks in our universe except for AFFIN, which we maintained our UNDERPERFORM rating. We upgrade our call for both MAYBANK and RHBBANK to OUTPERFORM, as the recent corrections in their share prices have set valuations looking attractive.

Source: Kenanga Research - 6 Oct 2016