Most of the banking stocks under our coverage met expectations, with the exception of CIMB and MAYBANK, which were above due to better-than-expected income from Islamic banking and lowerthan-expected impairments allowances. QoQ, earnings improved on account of lower impairment allowances despite soft topline as loans growth eased. All in, we maintain our NEUTRAL stance on the sector as the prevailing structural challenges in the system remain. We have MARKET PERFORM calls for most of the banking stocks in our coverage with the exception of AFFIN (TP: RM2.75), AMBANK (TP: RM4.75), CIMB (TP: RM6.75) and RHBBANK (TP: RM5.45) due to their undemanding valuations.

Jul-Sep 2017 results mostly in line. Of the 9 banking stocks in our universe, 5 were in line, with 2 above and 2 below. CIMB and MAYBANK were above expectations due to higher-than-expected income from Islamic Banking (CIMB) and lower-than-expected impairment allowances (MAYBANK).

Lower impairments propelled earnings. For the quarter, industry earnings improved by 10% QoQ partly due to strong performances from MAYBANK and HLBANK on account of lower impairment allowances. The rest saw softer earnings QoQ due to weak loans growth coupled with NIM compression.

Liquidity remained stable underpinned by moderate credit demand. Marginal rise in loans in the Q3 (+0.8%), driven primarily by mortgages. Deposits saw a similar traction (+0.6% QoQ). Liquidity looks manageable with industry LDR and LTF at 92.9% and 79.5%.

Downside pressure on NIM returning. QoQ, the industry’s NIM compressed by 4bps as average cost of funds (COF) trend higher by +6bps whilst asset pricing seemed relatively stable. NIM compressions were led by BIMB and CIMB on account of declining asset prices. ABMB strong NIM margins are attributed to asset pricing growth outpaced cost of funds.

Better economic conditions, better fee-based income. Fee-based income continued to improve QoQ and YoY at +4.4% and +7.1%, respectively, on improving market sentiments and economic conditions. QoQ, the improvements were led by CIMB (+14.7%) on strong investment & trading income with PBBANK’s (+8.4%) improvements was led by gains on financial instruments.

Cost-to-Income to stay elevated. Cost-to-Income (CIR) ratio nudged ahead by 10bps for the quarter, as banks increased opex on account of their on-going development in digital technology and hiring of new personnel as part of their Strategic/Transformation initiatives. We expect CIR to stay elevated ahead as banks continue with their own strategic initiatives.

Uptick in deterioration continues. Deterioration in asset quality continued as Gross Impaired Loans (GIL) ratio nudged ahead by 5bps QoQ to 2.02% (+8bps YoY). Moving forward we do not discount the further deterioration of asset quality ahead on account of: (i) higher credit demand, (ii) uptick in interest rates, and (iii) a new cycle of non-performing loans.

Lower credit charge as impairment allowances lowered. Credit charge improved, sliding down by 11bps to 0.31% attributed to strong performances from AFFIN, HLBANK and MAYBANK. Expect elevated credit costs in FY18 under the MFRS9 era.

Sector loan loss coverage (LLC) continued to track south as allowance for NPL contraction was slower than GIL deterioration (-0.6bps vs +5bps). Expect higher loan loss coverage 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). Although CET1 ratio will be reduced due to higher loan loss provisioning, we opine that impact will not be severe in 2018 due to the absence large scale capital raising exercise in the last 2 quarters.

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) moderate loans growth, and (iii) elevated credit costs due to MFRS9. TP revised down for AFFIN, AMBANK, CIMB, MAYBANK and RHBBANK on account of: (i) elevated credit costs, and (ii) elevated opex. We have a MARKET PERFORM call for most of the banking stocks in our coverage with the exception of AFFIN, AMBANK, CIMB and RHBBANK, which are OUTPERFORM due to sharp retracement of their share prices as we see attractive proposition with a potential total return of more than 10% each.

Source: Kenanga Research - 14 Dec 2017