The 1QCY13 reporting quarter yielded no major surprises. We continue to expect a pickup in earnings momentum ahead, backed by resilient household credit demand, ongoing rollout of ETP projects and stronger regional contribution. Key challenges we see include NIM pressure, rising overheads and credit costs as well as capital preservation. Overweight stance on the sector maintained. 

- 1QCY13 results in line with expectations.The recent 1QCY13 reporting quarter yielded no major surprises with all seven banking stocks that we cover reporting results that were in line with our and consensus expectations. That said, earnings momentum was softer this time round. Aggregate 1QCY13 net profit stood at MYR5.4bn (inclusive of CIMB’s MYR315m net gain from the sale of CIMB Aviva and restructuring costs) with y-o-y growth of +9% (+4.5% q-o-q) being the slowest pace of growth in 14 quarters. That said, we believe the softer 1QCY13 numbers were due to a combination of seasonal (1Q tends to be a slower quarter) and episodic (uncertainties stemming from the general election) factors. The banks generally appeared optimistic with respect to the outlook ahead, citing healthy loan and IB pipelines. The removal of the election overhang is expected to be positive for corporate activities as well. 

- Key takeaways.1) We believe asset quality could be back on investors’ radar following the q-o-q uptick in Maybank’s absolute gross impaired loans and the lumpy loan provisioning made by RHB during the quarter. However, these cases appear confined to borrowers from the manufacturing sector and not an indication of systemic asset quality issues; 2) NIMs remain under pressure from lower asset yields; 3) Banking groups with recent M&A activities will continue to face challenges in terms of cost control in the near term, especially with further potential integration/restructuring costs that could be incurred. For the other banking groups, CIR generally appears to be under control; 4) Malaysia banks are operating at a lower LDR as compared to peers in Singapore, Indonesia and Thailand. We do not expect major funding issues to fund the healthy loan pipelines; and 5) 1Q13 saw Malaysia banks disclose the capital components based on Basel III. This helped provide better clarity in terms of capital components for licensed entities that are also the listed entities (e.g. Maybank). For financial holding company structures, we still await the capital framework proposals from BNM. 

- Investment case. We are maintaining our Overweightstance on the sector. CIMB, AMMB and Maybank are our sector picks.

Source: RHB