For 1QCY17, all the nine (9) banking stocks under our coverage met our expectations. For the quarter under review, we saw; (i) falling earnings, (ii) liquidity expanding, (iii) NIM contained, (iv) falling NOII, (v) CIR higher, (vi) asset quality deteriorating, and (vii) credit costs improving. 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 call for most of the banking stocks in our coverage. We downgrade HLBANK to MARKET PERFORM as the recent surge in its share price has rendered its valuations demanding.

January-March 2017 results in line. All the 9 stocks in our banking universe performed within our expectations, as loans growth and loans loss provisions were within our estimates.

A not so satisfactory start. On a QoQ basis, earnings were a letdown in the 1Q, with 4 of the banking stocks (AFFIN, AFG, MAYBANK and PBBANK) registering negative growth. The others improved as AMBANK, BIMB, CIMB and HLBANK rebounded from the previous quarter with RHBBANK rebounding by 92% on lower impairments allowances.

Loans abysmal. Loans growths were abysmal, dropping by 350bps QoQ to 0.4%. All saw marginal growth with only AFFIN and CIMB seeing any semblance of decent growth at +2.0% QoQ and +1.4% QoQ, respectively. Deposits growths were better but slower QoQ by 170bps to +1.1% driven by strong growth by AMBANK and CIMB. With loans marginal, the loan-to-deposit-ratio (LDR) ticked lower by 69bps QoQ.

NIM contained. Net Interest Margin (NIM) was well contained, dropping by 1bps QoQ as CASA grew+2.9% QoQ outpaced deposits. Above industry CASA ratio of >30% were seen in AFG, BIMB, CIMB and MAYBANK.

Non-Interest Income dipped. Non-Interest Income (NOII) fell for the quarter after three straight months of growth. The notable drags were seen from both HLBANK and MAYBANK falling by 22% QoQ and 33% QoQ, but mitigated by AMBANK, BIMB and RHBBANK at 58%, 28% and 30% QoQ, respectively.

Cost higher but maintained. Cost-to-income ratio (CIR) was higher QoQ moving up by 3ppts to 49.1%. All saw deterioration with the exception of AMBBANK, BIMB and RHBBANK falling by 4ppts, 5ppts and 6ppts QoQ, respectively.

Deterioration in asset quality continues… Overall industry’s asset quality deteriorated slightly in QoQ at 3bps. The deterioration in asset quality can be seen in AFFIN, AMBANK and MAYBANK. Improvements were seen in CIMB, PBBANK and RHBBANK.

…but credit cost headed south. For 1Q, industry’s credit costs turned southward, improving by 11bps QoQ. Notable improvements were seen in CIMB, MAYBANK and RHBBANK, while upticks were seen in BIMB, HLBANK and PBBANK.

Sector loan loss coverage (LLC) continued to trek south as gross impaired loans (GIL) outpaced allowance for impairments. Notably below the 70% regulatory requirements were AFFIN and RHBBANK (excluding regulatory reserves).

Banks’ capital positions still comfortable. Most of the banks saw their common equity tier 1 (CET1) ratio deteriorated with the exception of AMBANK and RHBANK which ratios improved. Overall, the banks’ CET1 ratios are still comfortable, well above the regulatory requirements of 8.5%.

Challenging conditions prevailing…maintain NEUTRAL. We reiterate our NEUTRAL call with as we see no change in the prevailing challenges ahead. No concrete catalyst and game changer on the horizon. Moreover, structural and cyclical headwinds still prevailing such as; (i) moderate economy, (ii) subdued loans growth, (iii) downward pressure on NIM, and (iv) challenging asset quality. We maintain our MARKET PERFORM call for most of the banking stocks in our coverage. For HLBANK, we downgrade it to MARKET PERFORM as the recent surge in its share price has rendered its valuations demanding.

1QCY17 Results Summary

1QCY17 results in line. There were no surprises for the quarter with all the 9 stocks in our banking universe performing within our estimates. We maintain our FY17 estimates for most banking stocks with the exception of AFFIN, which was revised marginally by +0.8% on the assumption of better NIM ahead. For AFG, its (with its recently concluded FY17 results) FY18E earnings are shaved by 5% due to concerns on its loans growth.

Earnings a drag QoQ but surging YoY. QoQ earnings were a drag, falling by 5% QoQ but rebounded by +14% YoY. On a QoQ viewpoint, the impediment in earnings was pulled by subdued top-line growth. QoQ earnings were dragged by AFFIN (- 29%), MAYBANK (-28%) and PBBANK (-16%). Fall in top-line revenue dragged both AFFIN and MAYBANK, but higher impairments allowances coupled with marginal top-line dragged PBBANK’s earnings for the quarter. As for CIMB and RHBBANK, earnings surged by 38% and 92%, respectively, for the quarter due to lower impairments allowances.

On a YoY basis, earnings continued to record double digits growth driven by strong performances from CIMB (+45%), followed by AMBANK (+20%) and MAYBANK (+19%). CIMB’s performance was driven by strong top-line supported by strong loans at +12%. Both AMBANK and MAYBANK strong earnings were primarily galvanized by strong credit recovery (AMBANK) and lower impairment allowances (MAYBANK).

Loans growth stronger on a YoY basis as lending yields fell. Loans growths were almost marginal QoQ as only AFFIN (+2.0%) and BIMB (+1.4) saw any semblance of decent growth. The rest were marginal (+0.1% QoQ to +0.9% QoQ) with only RHBBANK flattish. On a YoY basis, loans continued to improve at +7.9% driven by BIMB, CIMB and MAYBANK recording double-digit growth at 13%, 12% and 10% driven primarily by mortgages and working capital. The improved loans can also be attributed to falling average lending yields by 14.5bps YoY (vs -8.5bps QoQ). Similar to loans, deposits growth saw similar performance; deposits slower by 170bps to +1.1% QoQ and 80bps YoY to +5.3%. AFFIN (-3% QoQ) and BIMB (-5% QoQ) saw falling growth whilst on a YoY basis, declining deposit was only seen at AFG (-2% YoY). BIMB and CIMB saw strong deposits growth YoY at +8% QoQ and 11% QoQ, respectively. As deposits outpaced loans growth for the quarter, the loanto-deposit-ratio (LDR) ticked lower by 69bps QoQ but surged up by 224bps YoY to 92.4%. We expect LDR to trek south due to: (i) moderate loans, and (ii) new cycle of deposit taking activities.

NIM contained as competitive loan pricing mitigated fall in cost of funds. NIM was well contained on a quarterly basis, falling by 1bps but improving by 4bps YoY. Strong CASA growth at +12% YoY vs QoQ growth of +3% drove the improved NIM. Despite lower funding costs (falling by 7bps QoQ and 16bps YoY) as deposits were repriced due to lagged adjustment in FD rates attributed to the cut in OPR in July 2016, the presence of competitive pricing of loans (ALY falling by 8bps QoQ and 14bps YoY) mitigated better NIMs both QoQ and YoY. We expect NIM compression in 2017 on the basis of: (i) lower pricing of loans, and (ii) banks searching for longer maturity of deposits.

Capital Market activities still weak for most of the banks with NOII performances supported by gains in disposal of assets. Non-Interest Income (NOII) dipped 5% QoQ after 3 months of consecutive growth but rebounded >3% YoY. On a QoQ basis, drag in NOII were seen in almost all the 9 banking stocks but mitigated by strong surge from AMBANK, BIMB and RHBBANK at 53%, 28% and 30%, respectively. While BIMB’s gains were driven by Takaful Business (+22% QoQ), AMBANK’s gains were reinforced by fee & commission income and gain on disposal of property, equipment plus profit sale of goods & services (up by RM111m). YoY, NOII gains were supported by gains from AFFIN (+40% YoY) and CIMB (+37% YoY) driven by gains in disposal of assets of RM18m (AFFIN) and gains in investment & trading income (CIMB). Going forward, we would not be surprised if the trend disposal/revaluation of financial assets continues throughout 2017.

Cost likely to trend up. After trending down in the last 6 quarters, cost-to-income ratio (CIR) rose by another 276bps QoQ to 49.1% but improved YoY, down by 56% bps. The rise is not unexpected as the start of the new financial year will see opex surging, primarily due to hiring of new personnel and higher wages. No surprise as PBBANK with its CIR of 34% (vs industry 49%) is the still best among its peers. We opined CIR is likely to trend up as the banks prepare to face the digital age in the light of growing emergence of FINTECH

Deterioration in asset quality, mostly from mortgages. Overall industry’s asset quality deteriorated slightly both QoQ and YoY but at a slower pace, rising 3.2bps QoQ and 18bps YoY. The deterioration in asset quality on a QoQ basis can be seen in AFFIN (+32bps), AMBANK (+34bps) and MAYBANK (+12bps). On a YoY basis, MAYBANK and RHBBANK led the deterioration at +28bps and +56bps, respectively. MAYBANK’s uptick in GIL was across the board in Malaysia, Singapore and Indonesia, primarily from mortgages and working capital while for RHBANK, the uptick was mainly from Singapore with upticks mostly from working capital. AFFIN’s uptick is mostly from mortgages.

Credit costs still high albeit lower. Although GIL deteriorated, credit costs were down, falling by 11bps QoQ and 9bps YoY to 32bps respectively after rising by 10bps both QoQ and YoY in 4Q16. Improvements on a QoQ basis was driven by CIMB (- 45bps) and RHBBANK (-47bps) whilst on a YoY basis, it was driven by BIMB (-32bps) and MAYBANK (-31bps). Asset quality is still volatile with credit costs still above its pre-crisis level of >30bps and likely to do so with household loans affected by higher cost of living.

Sector loan loss coverage (LLC) continued to track south as allowance for NPL contraction was slower than GIL deterioration (flattish vs +3.2bps). AFFIN and RHBBANK’s LLCs were below the 70% regulatory requirements but including regulatory reserve, both LLCs would be at 71.2% and 77.8%, respectively. A reason why some of the LLC is below 100% is that most of the banks’ loans are 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 robust. Banks common equity tier 1 (CET1) ratio is still robust, well above the required regulatory level of 8.5% (by 2019). 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 with LLC below the 100% mark.

Forecasts and risks

Cautious on growth ahead. No change in our view of challenging conditions ahead. Marginal changes in our FY17 estimates as we tweaked our forecast earnings slightly. Slight changes in our estimation for BIMB as we reduced its credit cost while the changes in AFG and AMBANK are due to their recently concluded FY17 results. As loans growth is still a challenge, earnings growth will be supported via lower impairment allowances and better NOII (via disposal gain/revaluation of financial assets). For FY18, our earnings are revised higher as impact on MFRS9 on AMBANK, AFG and HLBANK will only be felt from their FY19 financial year onwards.

TP revised for most stocks. Although the banks reported in-line results, there were 3 upwards TP revisions, 2 downwards and 3 unchanged. The revisions are mostly due to our valuation for FY18E utilising higher/lower PE and PB multiples to account for higher/lower ROE generation moving forward.

Challenging conditions prevailing…maintain NEUTRAL. We reiterate our NEUTRAL call with as we see no change in the prevailing challenges ahead. NO concrete catalyst and game changer on the horizon and structural and cyclical headwinds still prevailing such as; (i) moderate economy, (ii) subdued loans growth, (iii) downward pressure on NIMs, and (iv) challenging asset quality. We maintain our MARKET PERFORM call for most of the banking stocks in our coverage. For HLBANK, we downgrade it to MARKET PERFORM as the recent surge in its share price has rendered its valuation demanding.

Source: Kenanga Research - 9 Jun 2017