Despite the positive economic outlook, we maintain our Neutral call for the sector due to moderate loans growth. Valuation wise, we have imputed valuations to reflect improving ROEs ahead owing to (i) lowerthan-expected impairment allowances and (ii) healthier NIMs. We based our new valuations on the banks 5- year average P/BV but with variance of between -0.5 to -1.0 SD to reflect variance in (i) loans growth and (ii) credit charge risk among the banks. With the revised TP, we see undemanding valuations for some of the banking stocks in our universe. Our OUTPERFORM calls are AMBANK (TP: RM4.90) and AFFIN (RM2.90) with BIMB (RM5.20) as our top pick and proxy to the banking sector.

Surging interest due to positive outlook. Performance of banking stocks were excellent for 1QCY18 as the KL Finance Index (KLFIN) outperformed the FBMKLCI index by 520bps, advancing by 8.0%, pushed up by heavyweights PBANK(+15.5%), CIMB (+10.2%) and HLBANK (+10.1%). The positive economic outlook coupled with the impending GE14 saw renewed interest in banking stocks. While the strong performances of PBANK and CIMB can be attributed to their strong fundamentals (PBANK: strong operational efficiency and asset quality; CIMB: positive economic outlook across the region coupled with normalization of credit charge), the strong performances of HLBANK can be attributed to unexpected strong performance from its 20% associate Bank of Chengdu, which grew by 100% YoY.

A Recap on 4QCY17 Results

No surprises in 4QCY17 as most results were mostly in line; there was 2 (HLBANK and MAYBANK) above and 2 below (AMBANK and RHBBANK) estimates. The positive deviation in MAYBANK was due to lower-than-expected impairment allowances with HLBANK’s performance stemming from stellar contribution from its 20% China associate. Overall earnings for the 9 banking stocks in our universe improved slowly at +1.3% QoQ and +3.5% YoY on account of falling impairment allowances as credit charge slowly normalises. In terms of revenue, topline growth moderated as loans were a disappointment, marginal at +1.0% QoQ, moderating at +2.2% YoY. On a full-year basis, loans were driven by BIMB (+7% YoY) followed by AMBANK and MAYBANK (at 4% each). Fee-based income saw traction in 2017 (+6.2% QoQ and +4.9% YoY) as the improved economy propelled higher investment activities. The industry’s asset quality improved sequentially QoQ by 7bps but saw deterioration YoY, declining by 6bps. However, 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. The Industry’s credit charge trended downwards

in the last two quarters of 2017 and we expect normalization of credit charge ahead for 2018. AMBANK’s credit charge turned north for the first time since 3Q15 and we expect its credit charge to normalise ahead. The positive economic outlook coupled with resilient household is expected to contain credit charge ahead, eroding concerns of higher credit charge due to MFRS9.

Comfortable Capital for Banks as their CET1 ratios are still comfortably above the regulatory requirements of 7%, trending 12- 14% overall. While we expect deterioration in CET1 level ahead due to provisioning under MFRS9, guidance from banks are that the impact will be benign, eroding between 20-50bps thereafter, still well above the regulatory requirements.No change in our view of moderating growth ahead. We view the Banking sector with cautious optimism (despite the positive economic outlook coupled with downside risks on asset quality) premised on still moderating loans with banks staying cautious and selective on assets growth. Part of the caution on assets is to curb higher credit charge under the MFRS9 era. Thus, we expect system’s approval rate will still be tight (YTD 18: 43% vs historical 5-year average of 47%). However, earnings will be boosted by normalization of credit charge ahead.

Normalization of credit charge ahead. The guidance for 2018 credit charge was a surprise, lower than the initial assessment of potential impact under the MFRS9 era. Normalization of credit charge (pre 2016-17) is expected for 2018. The normalization and hence lower credit charge is due to the absence/lower provisioning under Stage 2 (Lifetime Expected Loss) due the positive economic outlook; hence, the expected higher impairment allowances are avoided. Due to selective assets by the banks, Stage 2 provisioning is also minimised as riskier industries/sectors are avoided. Although guidance on credit charge has been lower than expected, we do not discount volatility under the MFRS9 era if economic outlook shift downwards. On the NIM front, it is unlikely to see renewed downside pressure ahead due to: (i) loans growth moderating thus liquidity will be ample, (ii) ample liquidity will see downside pressure on funding costs, and (iii) most banks have complied with the NSFR requirement and liquidity coverage ratio (LCR) well above 100%. We expect NIM to trend upwards slightly boosted by the OPR hike in Jan 2018 recently.

We have revised our earnings estimates for CY18E upwards, at +12.9% (from +4.0% YoY) driven by: (i) lower credit charge at 0.35% (from 0.43% previously), (ii) higher NIM at 2.26% (up by 9bps from previous assessment), and (iii) higher fee-based income at +15.4% (from +6.6% previously) to take into account a positive economy and buoyant capital market activities. We, however, toned down our outlook on loans growth at 3-4% (from circa +6.0% previously) on account of selective asset growth by the banks.

Valuations revised to reflect better ROE ahead. Our valuations for the banking stocks in our universe are revised higher to reflect the potential of improving ROE ahead due to (i) lower-than-expected impairment allowances and (ii) healthier NIMs. We based our new valuations on the banks 5-year average P/BV but with variance of between -0.5 to -1.0 SD to reflect (i) moderate loans growth owing to selective asset growth and (ii) upside risks on credit charge. With the revised TP, we see undemanding valuations for some of the banking stocks in our universe.

... but demanding valuations for some. We maintain our Neutral call due to moderate loans growth ahead coupled with stretched valuations for most of the banking stocks in our universe. We have MARKET PERFORM calls for most of the banking stocks in our coverage with the exception of AFFIN, AMBANK and BIMB which are at OUTPERFORM due to undemanding valuations. Our Top Pick is BIMB due to: (i) its strong asset quality as seen in FY17 (GIL of 0.9% vs industry of 2.0% and second only to PBANK) which should translate to lower credit charge ahead due to the positive economy, resilient household with low unemployment, (ii) dividend yield of 4.8% (vs industry of 3.7%),and (iii) double-digit loans for FY18.

Valuation and recommendation

BIMB

We expect BIMB to target an aggressive double-digit (or a conservative~10%) financing growth but still selective on secured and less risky assets. Its upper-end single-digit financing growth in 2017 was due to its selective process on focusing on quality coupled with sluggish corporate loans at the end of 4QCY17. Asset focus will be based on the Value-based Intermediary Model (VBI) where financing towards assets that generate sustainable employment & entrepreneurship with positive impact to the economy, society & environment. Confident of its asset quality and good track record in assets, BIMB is expected to raise its personal financing (PF) contribution from 30% to 50% with mortgage financing reduced to 50% from 70% as PF have better financing rate; thus, defending its NFM. NFM will be further supported with the focus on more trade financing (in line with its VBI) as it has greater stability despite lower margins. With BIMB’s Net Stability Funding Ratio (NSFR) regulatory ratio at <100%, we expect funding costs pressure ahead in 2018, eroding its NFM but the recent OPR hike is expected to alleviate NFM concerns with management expecting NFM improvement of 4-5bps in 2018.

On top of undemanding valuation due to the sharp retracement in its share price, we are also positive on its fundamentals and its strong dividend yield of 4.8% (vs industry peers of 3.8%). We are positive on its FY18 loans target of circa 10% (FY17: 7% due to selective asset) and believe it to be achievable to within its average 5-year growth of 17%. Furthermore, its strong asset quality as seen in FY17 (GIL of 0.9% vs industry of 2.0%, which is second only to PBANK should translate to lower credit charge ahead due to the positive economy, resilient household with low unemployment. With strong financing growth coupled with normalised credit charge, we see its ROE at high teens (second only to PBBANK). Our TP is at RM5.20 based on a blended FY18E PB/PE of 1.6/11.8x (previously 1.6x/12.3x). The PB/PE is a 5-year mean with a -0.5SD to reflect the risks of its higher composition of PF. With a strong double-digit ROE second only to PBBANK, we reiterate our OUTPERFORM call.

Source: Kenanga Research - 5 Apr 2018