For 4QCY17, five (5) out of the nine (9) banking stocks under our coverage met our expectations (56%) with two (2) exceeded and the remaining two below. For the quarter under review, we saw; (i) lower impairments, which boosted earnings, (ii) moderate loans, (iii) NIM still under pressure, (iv) improved NOII, (v) CIR continued to improve, and (vi) asset quality improving. All in, we maintain our NEUTRAL stance on the sector as challenges remain in loans growth ahead. 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 AFFIN (RM2.90), AMBANK (TP: RM4.90) and BIMB (TP: RM5.20) which are rated as OUTPERFORM.

October-December 2017 results mostly in line. With 5 in-line estimates, 2 (AMBANK and RHBBANK) were below estimates with HLBANK and MAYBANK above. AMBANK was hit by unexpected credit charge as credit charge normalise (we had expected a credit recovery) while for RHBBANK, there was an unexpected impairment of assets (from its O&G portfolio). The positive deviation in estimates from MAYBANK was due to lower-than-expected impairment allowances. HLBANK’s positive deviation stems from stellar from its 20% China associate.

Earnings boosted by lower impairment allowances. Earnings improved but a slower pace at +1.2% QoQ and +3.5% YoY. AFFIN’s stellar performance was due to improving CIR (from 73% to 58% and falling impairment allowances by 99% to RM0.3m. Both HLBANK and PPBANK’s positive earnings were attributed to slower impairment allowances with topline moderating as fund-based income was soft.

Marginal loans, liquidity still ample. Loans growth in for the 9 banking stocks was marginal at 1.0% QoQ up by 20bps but easing by 290bps to +2.2 YoY (vs system’s loans of 4.2%). The quarter saw strong performance from BIMB (+5% QoQ) followed by AMBANK and MAYBANK at +2% QoQ each. CIMB’s negative growth for the quarter (-0.5%) was due to falling corporate loans by 2.6%. Sequentially, deposits growth (for the 9 banking stocks) for the quarter was 30bps higher to +0.9%) but YoY, it was below system yearly growth (+2.3% YoY vs +4.4% YoY). Most of the banking stocks showed slow or negative deposits growth with the exception of BIMB and AMBANK, which registered single-digit growth (+10.4% and +6.7% QoQ, respectively). As both loans and deposits showed similar traction, LDR was stable at 93% (+10bps QoQ). Similarly, liquidity in the industry is still healthy at 80.4% (+90bps QoQ).

Competitive funding costs unlikely. Overall, the industry showed further compression 4Q17 as NIM fell 4bps QoQ and 7bps YOY as despite uptick in CASA to 31.2%. Despite the uptick in CASA, cost of funds was up by 2bps to 2.65%, outpacing lending yields, which fell by 3bps to 4.58%. YoY, average lending yields fell by 5bps. With NSFR and liquidity coverage ratio within regulatory requirements, we do not foresee competitive funding costs ahead.

Non-interest income healthier on investment activities and disposal of assets. Fee-based income improved both QoQ and YoY. On a YoY basis, fee-based income rebounded to +4.9% with QoQ gaining a further traction to +6.2%. Improved economy with higher investment activities saw fee-based income gaining traction in 2017.

Expect higher opex ahead. QoQ, Cost-to-Income ratio (CIR) improved falling by 87bps to 47.3%. While we expected more prudency with the moderate topline growth, several banks are still in the midst with transformation/strategic changes with higher investments into digitization, which saw their opex higher and CIR trending upwards. We expect opex to trend higher putting upward pressure on CIR with the continued investments into digitization.

Asset quality looking stable ahead. Overall industry’s asset quality improved sequentially QoQ by 7bps but deteriorated YoY by 6bps. We expect GIL to trend downwards on account of the stable economy domestically and across the region which will augur well for both business and households, but we do not discount volatility on energy prices, which will impact those assets, which are tied to the sector.

Credit charge trending lower and expected to normalise ahead. Industry’s credit charge has been trending downwards in the last two quarters and we expect normalization of credit charge ahead for 2018. The positive economic outlook coupled with resilient household is expected to contain credit charge ahead eroding concerns of higher credit charge due to MFRS9.

Selective growth…we reiterate NEUTRAL. Going forward, we maintain our NEUTRAL stance. Although the positive outlook ahead should translate into higher loans ahead, we see selective asset growth ahead plus the lack of clear concrete catalyst and game changer going forward. We have MARKET PERFORM call for most of the banking stocks under our coverage with the exception of AFFIN, AMBANK and BIMB, which are rated as OUTPERFORM.

Source: Kenanga Research - 19 Mar 2018