For 4QCY16, six (6) out of the nine (9) banking stocks under our coverage met our expectations (67%) with two (2) exceeded and one (1) below. For the quarter under review, we saw; (i) slower earnings, (ii) liquidity contracting, (iii) NIM stabilising and widening, (iv) improved NOII, (v) CIR continued to improve, (vi) asset quality deteriorating, 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 maintain our MARKET PERFORM calls for most of the banking stocks in our coverage with the exceptions of AFG (RM3.79) and BIMB (RM4.15) which we downgraded to UNDERPERFORM while CIMB (RM5.29) was downgraded to MARKET PERFORM. AFFIN is maintained UNDERPERFORM.

October-December 2016 results largely in line. With the exception of Affin, AMBANK and MAYBANK, all stocks in our banking universe performed in line with our expectations. AFFIN and MAYBANK outperformed due to better NOII and operational efficiency while for AMBANK, we underestimated it as credit recovery and loans were better than expected (and guided).

Earnings boosted by strong performances by AFFIN, MAYBANK and PBBANK. Sequentially, earnings continued to improve in the Q4. The strong QoQ growth was essentially boosted by strong performance of AFFIN, MAYBANK and PBBANK. Broad healthy growth with widening NIMs bolstered both MAYBANK and PBBANK. AFFIN’s strong earnings were essentially better due to Non-Interest Income (NOII) gains and a lower tax rate.

Liquidity constricting as loans performed better in Q4. Loans growth was mixed on a QoQ and YoY basis. 4Q16 saw loans at its best performance for the year at 4% QoQ. The acceleration in Q4 was led by CIMB, BIMB and MAYBANK. Similar to loans, deposits growth saw similar performances; deposits improved by 280 bps to 2.8% QoQ. Deposits QoQ growth was driven by BIMB, MAYBANK and AFFIN. Cost of funds (COF) fell, attributed to strong CASA performances in the industry. As loans outpaced deposits growth, the loan-to-deposit-ratio (LDR) ticked higher by 1ppts QoQ.

Strong CASA growth saw improved NIM. Net Interest Margin (NIM) improved by 11bps QoQ as lower funding costs widened NIM. Lower funding cost was also attributed to better re-pricing of deposits. Above industry CASA ratio of >30% saw AFG, CIMB and MAYBANK widening their NIMs by 12, 17 and 15 bps, respectively.

Non-Interest Income healthier on gains from financial investments. Non-Interest Income (NOII) improved QoQ with CIMB, HLBANK and MAYBANK saw double-digit improvements. MAYBANK’s improvement was due to higher net insurance income while for HLBANK, it was due to better fee income and gains on revaluation of assets (HLBANK) with CIMB’s improvement due to gains/sale of financial instruments.

Cost discipline maintained. Cost-to-income ratio (CIR) improved QoQ falling by 261bps to 46.3%. PBBANK is the still best among its peers. On a QoQ basis, most of the banks showed better prudency with falling CIR except for CIMB, which saw higher CIR QoQ alluded to higher administrative and marketing expenses.

Deterioration in asset quality from higher corporate loans. Overall industry’s asset quality deteriorated slightly in QoQ at 4bps. The deterioration in asset quality can be seen in CIMB, MAYBANK and RHBBANK. CIMB and MAYBANK saw further deterioration in its corporate loans in Q4 while for RHBBANK, it was due to exposure to the O&G sector in Singapore.

Industry’s credit cost tracked higher for both QoQ and YoY. For Q4, industry’s credit costs turned northward, deteriorating by 10bps QoQ. Recall that Q3 credit costs improved QoQ primarily to MAYBANK’s improvement due to the absence of lumpy impairments that was seen in the 1HCY16. Although both CIMB and RHBBANK’s credit costs ended alarmingly steep for the quarter, their annual credit costs was much lower at 78bps and 56bps, respectively.

Sector loan loss coverage (LLC) continues to trek south as allowance for NPL’s contraction was slower than GIL’s deterioration. AFFIN and RHBBANK’s LLCs were below the 70% regulatory requirements but including regulatory reserve, both LLC will be at 94.3% and 74.7%, respectively. A reason why some of the LLC is below 100% is most of the banks’ loans are well collateralised thus less focused on allowance for NPLs.

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

Challenging conditions prevailing…maintain NEUTRAL. We maintained our NEUTRAL view with the challenges of 2016 prevailing into 2017. Our view of structural and cyclical headwinds such as; (i) moderate economy; (ii) slower loans growth; (iii) downward pressure on NIM; and (iv) challenging asset quality, remains and will prevail in 2017. We maintain our MARKET PERFORM calls for most of the banking stocks in our coverage with the exception of AFFIN, AFG, BIMB and CIMB. For AFFIN, TP is raised but UNDERPERFORM call maintained. For AFG and BIMB, we downgrade it to UNDERPERFORM with TP revised downwards. CIMB downgrade to MARKET PERFORM but TP revised upwards slightly.

4QCY16 results mostly in line. Of the 9 stocks in our banking universe, 6 were in line with our estimates. The remaining 3, AFFIN and MAYBANK were above our estimates with AMBANK below. Our underestimation of AMBANK was due to its betterthan-expected credit recovery and loans. AFFIN and MAYBANK exceeded our expectations as AFFIN experienced higher-thanexpected Non-Interest Income while MAYBANK saw lower impairments and better operational efficiency. We have revised our FY17 estimates for all of our banking stocks except for PBBANK (where our estimates are consistent with management’s guidance. We toned down; (i) AMBANK (-5%) due to higher Cost to Income Ratio (CIR); (ii) BIMB (-3.2%) on higher credit costs but weaker financing growth and NIMs compressions; and (iii) RHBBANK (-1%) on concerns on higher credit costs and NIMs compression. For the rest, we revised our estimates upwards; (i) AFFIN (+21%) on better loans and higher NIMs, (ii) AFG (1%) on higher NIMs, (iii) CIMB (+2%) on lower CIR, (iv) HLBANK (+2%) on widening NIMs and lower credit costs; (v) MAYBANK (+4%) on higher loans and lower credit costs.

Earnings boosted by strong performances by AFFIN, MAYBANK and PBBANK in Q4. Sequentially, earnings continued to improve in the Q4 both on a QoQ and YoY basis at 9.5% and 17.6%, respectively. The strong almost double-digit QoQ growth was essentially boosted by strong performance of AFFIN (23% QoQ), MAYBANK (32% QoQ) and PBBANK (20% QoQ). Broad healthy growth with widening NIM bolstered MAYBANK QoQ earnings while PBBANK was aided by widening NIM and a credit recovery. AFFIN’s strong earnings were essentially better due to Non-Interest Income (NOII) gains and a lower tax rate. The rest saw declining earnings QoQ due to weak top-line growth and higher impairments) with the exception of HLBANK, which registered a slight traction at +1% QoQ (strong topline and widening NIM).

Liquidity constricting as loans performed better in Q4. Loans growth was mixed on a QoQ and YoY basis. 4Q16 saw loans at its best performance for the year at 4% QoQ but YoY it slowed to +6% YoY (4Q15: +10% YoY). The acceleration in Q4 was led by CIMB (+6%) with BIMB and MAYBANK (at 5% QoQ). CIMB strong performance can be attributed to higher loans growth from its overseas operations (domestic/overseas: +4%/+9% QoQ for CIMB) despite its Average Lending Yield (ALY) for the quarter at the highest at 5.45% (vs industry average of 4.64%). Lower ALY (4.15%) and strong performance from overseas operations (domestic/overseas: +6%/+5% QoQ for MAYBANK) contributed to MAYBANK’s acceleration. Similar to loans, deposits growth saw similar performances; deposits improved by 280 bps to 2.8% QoQ but slower YoY by 5ppts to 4% YoY. QoQ, deposits were driven by BIMB (11% QoQ), MAYBANK (9% QoQ) and AFFIN (5% QoQ). The improvements were in contrast to falling cost of funds (COF) which fell 140 bps QoQ and 13ppts YoY to 2.59%, which can be attributed to strong CASA performances in the industry. CASA outperformed deposits at 5% QoQ and 8% YoY with CASA ratio which improved by 60bps QoQ and 108bps YoY to 30%. As loans outpaced deposits growth, the loan-to-deposit-ratio (LDR) ticked higher by 1ppts QoQ and 2ppts YoY to 93.1%. We expect LDR to turn south moving forward due to: (i) subdued loans, and (ii) new cycle of deposits taking activities.

Strong CASA growth saw improved NIM. The improvement in CASA saw Net Interest Margin (NIM) improved by 11bps to 2.26% QoQ as lower funding cost widened NIM. Lower funding cost was also attributed to better re-pricing of deposits (with the lagged adjustment in FD rates due to the cut in OPR in Jul 2015) with the maturity of short-term deposits. Above industry CASA ratio >30% saw AFG, CIMB and MAYBANK widening their NIMs by 12, 17 and 15 bps, respectively. We expect NIM compression in 2017 will be inevitable with the new cycle of deposit taking activities and banks searching for longer maturity for deposits.

Non-Interest Income healthier on gains from financial investments. Non-Interest Income (NOII) improved both QoQ and declined YoY at 5% QoQ and -0.4%, respectively. CIMB, HLBANK and MAYBANK saw double-digit improvements at 12%, 20% and 20%, respectively. Improvement in MAYBANK was due to higher net insurance income while for HLBANK, it was due to better fee income and gains on revaluation of assets (HLBANK) with CIMB’s improvement due to gains/sale of financial instruments. 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) improved both on a QoQ and YoY basis, falling by 261bps and 437bpps, respectively, to 46.3%. Not a surprise, PBBANK with its CIR of 32% is the still best among its peers. On a QoQ basis, most of the banks showed better prudency with falling CIR except for CIMB, which saw higher CIR QoQ alluded to higher administrative and marketing expenses. AMBANK, BIMB and RHBBANK bucked the trend, partly attributed to their falling opex which outpaced the fall in income.

Deterioration in asset quality from higher corporate loans in Q4. Overall industry’s asset quality deteriorated slightly in QoQ at 4bps but higher YoY at 20bps. The deterioration in asset quality can be seen in CIMB, MAYBANK and RHBBANK. CIMB and MAYBANK saw further deterioration in its corporate loans in Q4 while for RHBBANK, it was due to exposure in the O&G sector in Singapore. We believed asset quality will still be a challenge for 2017 and will likely to come from household loans as cost of living is northwards heading.

Industry’s credit cost trekked higher for both QoQ and YoY. After bucking the trend in Q3, industry’s credit costs turned northward, deteriorating by 10bps both QoQ and YoY. Recall that Q3 credit costs improved QoQ primarily to MAYBANK’s improvement due to the absence of lumpy impairments that was seen in the 1HCY16. The absence was due to reclassification of its R&R loans to performing. Only AMBANK and PBBANK bucked the trend with credit recovery of 36 and 5 bps, respectively. Although both CIMB and RHBBANK’s credit costs ended alarmingly steep for the quarter, their annual credit costs were much lower at 78bps and 56bps, respectively. Given such prevailing economic conditions, we remained cautious and expect credit costs to remain challenging albeit lower.

Sector loan loss coverage (LLC) continued to track south as allowance for NPL’s contraction was slower than GIL’s deterioration (-5.54bps vs +4.5bps). AFFIN and RHBBANK’s LLCs were below the 70% regulatory requirements but including regulatory reserve, both LLC will be at 94.3% and 74.7%, respectively. A reason why some of the LLC is below 100% is due to most of the banks’ loans being secured, thus less focus on allowance for NPLs. We expect loan loss coverage heading northwards in FY17 as the banks comply with MFRS9 by 1 Jan 2018.

Banks’ capital position still comfortable. Most of the banks saw their common equity tier 1 (CET1) ratio improved with the exception of AFFIN, AFG, AMBANK and HLBANK which ratios fell. The drop was due to risk weighted assets outpacing growth in CET1 from the previous quarter. Overall, the banks’ CET1 ratios are still comfortably above the regulatory requirements of 7%. With CET1 and Capital Ratios well above the required regulatory level, pushing the LLC above the 100% mark will not be an issue for banks whose LLC is below the 100% mark.

Growth is still a challenge ahead. No change to our view of prevailing challenging conditions ahead as we toned down our FY17 estimates slightly. Our earnings estimates for FY17E are revised downwards for AMBANK, BIMB and RHBBANK taking into account elevated credit costs, lower NIMs and higher CIRs. PBBANK’s estimates are maintained as guidance from management are well within our estimates. For the rest, we revised upwards as we expect lower credit costs, widening NIMs and higher loans to prevail. Overall, we expect the banking sector’s CY17 earnings to be slightly lower at 4.0% YoY (from +7.2% YoY previously). Compounding the drag in CY17 earnings are; (i) slower industry loans at +5.8% (from +6.5% previously), (ii) NIMs compression by 5bps (previously 1bps), but (iii) unchanged industry’s credit costs at 35bps. We also introduce our CY18 estimates mindful that earnings will be impacted by the implementation of MFRS9. We expect: (i) industry’s loans at ~ +6.0%, (ii) slightly lower compression for NIM, say 2bps, and (iii) credit costs spiking higher to 47bps as the industry implements the MFRS9 measures.

Valuation and recommendation

TP revised for all stocks except PBBANK. Although most banks reported in-line results, there were 5 upwards TP revisions, 3 downwards and 1 unchanged. The revisions are mostly due to our valuation for FY17E utilising higher/lower PE and PB multiples to account for higher/lower ROE generation moving forward. For AFFIN/CIMB, the upward revisions were due the revision in earnings upwards.

Challenging conditions prevailing…maintain NEUTRAL. Going forward into 2017, we maintained our NEUTRAL view with the challenges of 2016 spilling into 2017 plus the lack of clear concrete catalyst and game changer going forward. Our view of structural and cyclical headwinds such as; (i) moderate economy; (ii) slower loans growth; (iii) downward pressure NIMs; and (iv) challenging asset quality, remains and will prevail in 2017. Hence, our cautious stance is maintained. We maintained our MARKET PERFORM calls for most of the banking stocks in our coverage with the exception of AFFIN, AFG, BIMB and CIMB. For AFFIN, TP is raised but UNDERPERFORM call maintained as we feel its loans growth target will be challenging. For AFG and BIMB, we downgrade them to UNDERPERFORM with TP revised downwards as we feel that their earnings will be slower due to higher credit costs, constricting NIMs and lower loans. CIMB was downgraded to MARKET PERFORM, but TP revised upwards slightly as we are still cautious on the prospects of CIMB going forward given the volatile and slow environment and we believe management’s targets for FY17 can be achieved via efficiency in operational and further joint ventures.

Source: Kenanga Research - 9 Mar 2017