For 3Q18, seven (7) of the ten (10) banking stocks in our universe met expectations, with two (2) exceeded and one (1) below. For the quarter under review, we saw earnings supported by lower than expected credit costs as loans slowed with fee-based income soft. NIM traction was slow with the absence of further rate hike and deposits taking activities still intensive. Moving ahead, we view the industry with caution as loans moderate with soft capital market activities. On the positive side, we opined that asset quality will be stable giving rise moderate credit costs supporting the banks’ bottomline. Neutral stance maintained. We have an OUTPERFROM call for most of the stocks in our banking universe due to undemanding valuations – ABMB (TP: RM4.40), AFFIN (TP:RM2.60), BIMB (TP:RM5.05), CIMB (TP:RM6.05), MAYBANK (TP:RM9.75), MBSB (TP:RM1.25) and RHBBANK (TP:RM5.75) with only HLBANK (TP: RM20.15) and PBBANK (TP: RM23.85) and at MARKET PERFORM. AMBANK (TP:RM4.50) reduced to MARKET PERFORM as valuations are demanding. As total industry returns are still ~8% the industry remained at NEUTRAL.

3Q18 results mostly in line. With 7 in-line estimates, 2 (BIMB and RHBBANK) were above estimates with only CIMB below due to weak fee-based income, below target loans and downside pressure on NIM (mostly from Indonesia). Both BIMB and RHBBANK benefited from lower-than-expected impairment allowances supported by higher-than-expected financing (BIMB) and better-than-expected NIM and Islamic banking income (RHBBANK).

Earnings led by CIMB and HLBANK. Sequentially, earnings improved by +6.0% QoQ, pushed by CIMB (+14% QoQ as fee-based income rebound +20% QoQ)) and HLBANK (+13% QoQ supported by +24% QoQ surge from BOCD to RM146m) to RM6,760m. Only ABMB, MAYBANK and PBBANK saw relatively flat performance while RHBBANK improved by +1.5% QoQ to RM579m. AFFIN’s stellar growth (+97% QoQ to RM145m) were due to lower impairment allowances. Industry’s net profit margins has risen to ~37% in 3Q18 (from its lows of 29% in 2Q16) due to the absence of large-scale impairment allowances) comparable to 2012’s net profit margin of ~38%.

Loans in the industry slower but liquidity mixed. Loans slowed both sequentially (-10bps to +1.5%) and yearly (-30bps to +4.7%). QoQ, the deceleration was led by HLBANK (-230bps to +0.6%), MAYBANK (-70bps to 1.1%) and AMBANK (-60bps to +1.6%). Bucking the trend was AMBM and CIMB (+80bps each to +1.2% and +2.6% respectively) with RHBBANK adding another 170bps to 1.8% QoQ. Overall loans growth is trending upwards after hitting its 5-year low of +2.1% YoY in 4Q17.

Deposit intakes were positive, reversing its contraction previously to +1.6% QoQ. All banks saw positive growth for the quarter except for MAYBANK, which was relatively down (-0.6%) due to strategic reasons. As deposits outpaced loans, loan-to-deposit ratio (LDR) fell marginally by 10bps to 94.2%. YoY LDR saw an uptick of 100bps. In terms of liquidity, HLBANK saw a healthier liquidity as its LDR was below industry average at 81.7% followed by AFFIN at 88.1%. Overall liquidity in the industry is mixed as loan-to-fund ratio is at the 81% mark (+40bps QoQ) vs industry’s LDR of 94.2% (vs their respective 5-year low of 87% and 74%, respectively, in 3Q13). As credit demand is expected to be moderate moving forward, we opined liquidity is ample for now.

NIM widened slightly, but downside pressure still lingers. QoQ, NIM widened slightly by +2bps to 2.24% (vs 5-year high of 2.43% in 3Q13) led by BIMB (+24bps) due to better repricing of assets with cost of funds stable. Overall, the industry saw little traction in NIM due to deposit intakes still intensive and absence of further rate hike as seen in Jan 18. Downside pressure on NIM seems abated ahead with the deferment of compliance to the NSFR until 2020 with some banks likely to review their strategy of shoring their deposits as was seen in 1H18. However, we still see compression ahead as banks will face competition in shoring their low-cost funding via SMEs traction.

Capital Markets still volatile. After 2 consecutive quarters, 3Q saw a rebound in the banks fee-based income, growing at +3.1% QoQ. Fee-based income contribution of ~25% in 3Q is amongst the lowest vs 4Q13 contribution of 32%. Improvements were seen at most banks with the exception of ABMB and MAYBANK whose fee-based income saw negative growth at 13% and 16%, respectively. Uncertainties both in the external and domestic front have undermined capital markets with fee-based income continues to decline YoY (-9.8% vs -8.7% in 2Q).

Cost discipline maintained. QoQ, Cost-to-Income ratio (CIR) improved by falling 20bps to 46.6%. Both MAYBANK and MBSB saw upticks in CIR due to establishment costs (MAYBANK) and transition into a fully banking platform (MBSB) but still within guidance for both. Overall, the industry saw lower CIR as topline outpaces expenses. YoY, CIR fell (-155bps) for the third consecutive quarters. We view the industry will still see disciplined cost management ahead in light of challenging earnings.

Asset quality continues to improve, with gross impaired loans ratio (GIL) falling by 2bps QoQ and 11bps YoY to 2.12%. YoY, improvements can be seen at CIMB (-350bps), CIMB (-38bps) and HLBANK (-17bps). While GIL has been above the 2% mark since 2Q16, we opined that 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. Those that will be impacted to the volatility will likely be from CIMB, MAYBANK and RHBBANK.

Credit charge normalizing. The improvement in asset quality is manifesting in the decline in impairment allowances. Credit charges are lower both QoQ (-5bps) and YoY(-6bps) to 0.26% and way below the range of 0.45%-0.48% recorded in 2016. The steep fall in MBSB’s credit charge is attributed to overprovisions in the previous quarters while the strength of HLBANK and PBBANK credit charge (both at 0.06%) is a testament of their efficiency in asset selection. Going forward, we feel that current credit charge costs will be the new norm given the stable economy and employment. We, however, see risks from banks exposed to large corporations and energy/commodity-related activities that will give volatility in credit costs given the prevailing uncertainties external headwinds.

Banks’ capital positions comfortable, impact of MFRS9 muted. Overall, the banks’ CET1 ratios are still comfortably above the regulatory requirements of 7% (4.5% equity capital + 2.5% capital conservation buffer. Impact of MSFR9 seems to be muted. From BNM’s 1H18 Financial Stability Report, the central bank seems satisfied with the improving asset quality and the current CET1 and Capital (industry capital ratio at ~17%) ratios. We opined that the central bank does not see a major shock in the system in the short term thus, satisfied with the present Capital Adequacy Ratios.

Source: Kenanga Research - 19 Dec 2018