Our Neutral view on the sector remains with system and industry loans growth for CY2018 expected to be moderate. We don’t see any catalysts or game changers ahead with industry earnings likely to be challenged by (i) easing moderate loans and (ii) elevated credit costs. We expect NIM to alleviate slightly albeit for a short-term due to the impending OPR hike. We maintain to OU have PERFORM call for AFFIN (TP: RM2.75), AMBANK (RM4.75), CIMB (6.75) and RHBBANK (TP: 5.45) with th the rest at MARKET PERFORM with HLBANK at UNDERPERFORM. We have AMBANK as our Top Pick as its current market cap makes its undemanding valuations unjustifiable.

Market Outperformed. As of 15 Dec 2017, the KL Finance Index has advanced by 15.3% and outperformed the FBMKLCI Index by 85bps. YTD, all the banking stock (with the exception of AFFIN) in our universe made gains with CIMB, HLBANK and MAYBANK outperforming both the FBMKLCI and KLFIN. YoY results in 3QCY17 were mostly in line with estimates as earning improved by 12% due to strong topline, boosted by improved NIM and falling credit costs. Positive economic news on both domestic and external front pushed both CIMB and MAYBANK as they proxies for positive upturn with HLBANK’s sharp appreciation due to positive news from China and undemanding valuations.

Recap – 3QCY17

Results 3QCY17 results were mixed with 2 above expectations and 2 below and the remainder within expectations. The better-tanexpected and MAYBANK were partly due to: (i) better-than-expected Islamic banking income (for CIMB) and (ii) lower impairment allowances from other financial assets (MAYBANK). AMBANK’s results were below expectations due to lower-thanexpected credit recovery, while AFFIN was dragged by higher opex due to its VSS exercise. The rest were in line as earnings were propelled by lower impairment allowances (as expected) coupled with soft topline as loans slowed and NIMs compressed.

Loans continued to ease. Loans saw a marginal rise in Q3 (+0.8% QoQ) following 2 consecutive dips. Loans for the quarter were driven primarily from residential property financing. YoY, loans were higher at +5.1% albeit easing YoY for the 3rd consecutive quarter. Most banks saw positive traction except for ABMB which was ABMB,inally flattish (-0.5%). YoY, financing to SME and residential property mortgages were movers growing at +5.4% YoY and +10.7% YoY, respectively.

NIM compressed QoQ and moderated YoY. QoQ saw the industry’s NIM compressed by 4bps as average cost of funds (COF) trend higher in contrast to relatively stable asset pricing. Most of the banks saw compression for the quarter with the exception of AMBM, RHBBANK and PBBANK. YoY, NIM improved as asset pricing outpaced COF. The slower COF can also be attributed to strong CASA growth by +8.4% YoY, which pushed industry CASA ratio to 30.7%.

Net Asset quality looks contained. Gross Impaired Loans (GIL) ratio nudged ahead by 5bps QoQ and 18bps YoY to 2.07% mostly pushed by AFFIN and CIMB with an uptick of 9 and 25bps, respectively. On a net basis, their impaired loans were better at 1.5% and 1.0% as most of the upticks were caused by loans that were “Rescheduled & Restructured (R&R)”. In contrast to GIL, credit charge improved, sliding by 11bps QoQ and 2bos YoY to 0.31% due to impaired asset categorised as performing post their Reschedule/Restructured (R&R) and Impaired due Judgemental/Obligatory Triggers (IPL) period.

Source: Kenanga Research - 4 Jan 2018