For 2QCY17, all the nine (9) banking stocks under our coverage met our expectations. YoY, earnings improved as impairment allowances fell as expected with improvement in asset quality. We also see widening NIMs due to better management in funding costs and better repricing of assets. However, loans growth seemed to be easing. 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 with the exception of AFFIN (TP: RM3.00), AMBANK (TP: RM5.00), AFG (TP: RM4.15) and RHBBANK (TP: RM5.60) due to their undemanding valuations.

April-June 2017 results in line. All the 9 stocks in our banking universe performed within our expectations, attributed to lower impairments YoY and improved loans growth, as expected.

Higher impairments seen in 2Q. 2Q was a disappointment as the quarter was hit by higher-thanexpected impairments allowances QoQ. QoQ earnings fell by 2% dragged by BIMB, CIMB, HLBANK and MAYBANK.

Loans were flat QoQ with liquidity still manageable. After a marginal rise in 1Q, 2Q saw flattish loans growth QoQ. All with the exception of AFG, CIMB and MAYBANK saw a semblance of healthy growth for the quarter. AMBANK and BIMB recorded good growth at 2.0% QoQ each, driven by residential properties & SME’s (AMBANK) while for BIMB, its loan growth was driven by financing for purchase of residential properties and personal financing. Liquidity looks manageable in the light of dismal loans with both loanto-deposit-ratio and loan-to-fund ratio comfortable at 93% and 80%, respectively.

Improving NIMs but challenges ahead. Overall industry NIMs seemed to be improving both QoQ and YoY on account of lower funding costs and repricing of assets. However, we still maintain the risk of downward pressure on NIMs when credit demands surge on the back of improving economic conditions plus the added pressure of complying for NSFR9 in 2018 where banks will strive for longer tenure deposits.

Fee-based income improved but capital market still soft. Improving market sentiments and economic conditions supported the industry’s fee-based income as it progress forward both QoQ (+4.0%) and YoY (+4.2%). Leading the charge was AFFIN with surging fee-based income by 34% QoQ and 58% YoY. However, capital market activities were still soft as the big boys CIMB and RHBBANK saw their fee-based income falling both QoQ and YoY.

Cost-to-Income improved due to better top-line. Cost-to-Income ratio turned southwards both QoQ and YoY shedding by 113bps and 70bps, respectively, as operating income outpaced operating expenses (QoQ: +2.4% vs 0.1%; +8.1% vs +6.5%).

Uptick in deterioration QoQ due to R&R. We see uptick in deterioration in industry’s asset quality with Gross Impaired Loans ratio (GIL) up by 5bps QoQ, but on a YoY basis deterioration in asset quality seemed to be easing by 12bps. QoQ uptick was mostly pushed by AFG and MAYBANK with upticks of 12bps and 13 bps, respectively.

Temporary blip in credit costs. As with the uptick in GIL, credit costs also hiked QoQ by 10bps as expected. However, on YoY basis, credit costs were lower falling by 2bps. Upticks were mostly due to rise in Reschedule & Restructured corporate loans and households due to the festive season in June. We expect this uptick in GIL to be a temporary blip and expect write-backs by 4Q as costs stabilize with the softening USD.

Sector loan loss coverage (LLC) continued to track south as allowance for NPL contraction was slower than GIL deterioration. We expect loan loss coverage to head 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 and is well above the required regulatory level of 8.5% (by 2019).

No favourable catalyst in the short-term ahead, current conditions prevailing…maintain NEUTRAL. We reiterate our NEUTRAL call as we see no change in the prevailing conditions ahead. There is no concrete catalyst and game changer on the horizon and structural and cyclical headwinds are still prevailing such as; (i) moderating economy, (ii) subdued loans growth, and (iii) downward pressure on NIM. We maintain our MARKET PERFORM call for most of the banking stocks in our coverage with the exception of AFFIN, AFG, AMBANK and RHBBANK, which are at OUTPERFORM as at current share prices, we see attractive proposition with a potential total return of more than 10% each.

Source: Kenanga Research - 14 Sept 2017