For 3QCY16, eight (8) out of the nine (9) banking stocks under our coverage met our expectations (89%) with only one (1) above. For the quarter under review, we saw; (i) no let-up in slow earnings, (ii) liquidity contracting, (iii) NIMs stabilizing, (iv) improved NOII, (v) CIR continued to improve, (vi) asset quality continued to deteriorate, and (vii) credit costs still challenging. 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 maintained our MARKET PERFORM calls for most of the banking stocks in our coverage with the exception of AMBANK (RM4.63) and AFFIN (RM2.20). AMBANK is upgrade to OUTPERFORM as the stock is looking attractive due to the weakness in its share price while AFFIN is maintained UNDERPERFORM

July-September 2016 results largely in line. With the exception of Affin, all the stocks in our banking universe were in line with our expectations. AFFIN outperformed due to lower loan loss provisions than expected (and guided).

Earnings boosted by lower impairments. Sequentially earnings improved in the 3rd quarter after 3 consecutive quarters of decline at 17% although earnings continued to decline on a YoY basis at 11%. The double-digit quarterly growth was essentially bolstered by MAYBANK’s earnings which surged by 55% attributed to the absence of lumpy impairments for the quarter

Liquidity constricting QoQ but unlikely to constrict further. Both QoQ and YoY saw deceleration in loans growth at +1.6% QoQ and +2.6% YoY, respectively. Industry deposits were mixed, growing 3.9% on a YoY basis but contracting marginally at 0.2% QoQ. As loan outpaced deposits growth, loan-deposit-ratio (LDR) ticked higher by 2ppts QoQ to 94.3%. With loans growth expected to be subdued in the coming quarters we see LDR trending downwards with liquidity likely adequate in an environment of subdued loans ahead.

Flattish NIMs for the quarter, unlikely to be an issue going forward. On a YoY basis NIMs compression continued as NIMs compressed 16bps YoY as contraction in average lending yield (-bps 22) outpaced cost of funds (-3bps). Further NIMs compression is unlikely to be an issue as deposits pricing is unlikely to be competitive (as deposits intake becomes less intensive) given that banks are comfortable with their liquidity currently in an environment of slow growth.

Non-Interest Income healthier on gains from financial investments. Healthier due to gains of disposal/revaluation of financial investments/assets. AFG and BIMB led the contraction in NOII due to forex loss and higher fee & commission expense (AFG) while poor returns from investment of shareholders’ funds dragged BIMB’s NOII. Going forward, we would not be surprised if banks continue with their disposal/revaluations of their financial assets.

Cost discipline maintained. Cost-to-income ratio (CIR) was flat albeit a slight increase by 20bps QoQ. On a QoQ basis, most of the banks showed better prudency with flattish CIR except for CIMB which saw higher CIR QoQ alluded to higher administrative and marketing expenses.

Spike in asset quality due to prudent measures. Overall the industry’s asset quality seems to have stabilized QoQ with gross impaired loans (GIL) flattish after deteriorating in the last two quarters. The spike in deterioration of asset quality in AFFIN and RHBBANK was due to prudent measures to reclassify some of its performing loans as impaired. Although asset quality is challenging for CY16 (especially for those that are exposed to the volatile O&G sector), we expect asset quality to firm up in 2017.

Industry’s credit cost slower QoQ and YoY. Credit costs improved both QoQ and YoY primarily on MAYBANK’s improvement in the absence of lumpy impairments that was seen in the 1HCY16.Given the prevailing economic conditions, we remained cautious and expects credit costs to remain challenging albeit lower.

Sector loan loss coverage (LLC) almost flattish as allowance for NPL’s contraction was slightly faster than GIL’s improvement (+4.8bps vs +10.4bps). Although some banks’ LLC are below the 100% level, this is because most of their loans are secured, thus less focus on higher LLCs.

Banks’ capital position still comfortable. Most of the banks saw their common equity tier 1 (CET1) ratio improved with the exception of BIMB, MAYBANK and PBBANK whom ratios fell. Overall, the banks’ CET1 ratios are still comfortably above the regulatory requirements of 7%.

Lacking concrete catalyst…still NEUTRAL. We made no change in our NEUTRAL view of the absence of concrete catalyst and no clear game changer going forward. Our view on structural and cyclical headwinds such as; (i) moderate economy; (ii) muted loans growth; (iii) moderate NIMs; and (iv) challenging asset quality, remains. With most of the 3QCY16 results in line, we maintain our calls for most of the banking stocks in our coverage with the exception of AMBANK which we maintained our TP but upgrade the call to OUTPERFORM as the stock is looking attractive due to the weakness in its share price.

Source: Kenanga Research - 9 Dec 2016