The  2QCY13  reporting  quarter  was  largely  uneventful.  Non-interest income  was  resilient  while  most banks’ credit cost was lower  than expected.  The  impact  from  the  rise  in  bond  yields  was  also  not  too significant.  However,  margins  remained  under  pressure  while  the banks’ loan  growth  was  weaker-than-expected,  although  we  believe  it will pickup in 2H2013. Maintain NEUTRAL on the sector.

- 2QCY13  results  largely  in  line  with  expectations.  During  the  recent 2QCY13  reporting  quarter,  six  out  of  the  seven  banking  stocks  that  we cover  reported  results  that  were  in  line  with  our  and  consensus estimates.  The  remaining  stock,  HL  Bank,  reported  results  that  were slightly  below  our  and  consensus  expectations  due  to  weaker-than-expected  net  interest  income.  In  the  preceding  reporting  quarter,  all the seven  banking  stocks  posted  results  that  were  in  line  with  our  and consensus  forecasts.  Overall,  the  aggregate  2QCY13  net  profit  eased 2%  q-o-q  (+3.5%  y-o-y)  to  MYR5.2bn,  mainly in the absence of CIMB’s lumpy  MYR515m  gain  from  sale of  CIMB  Aviva  in the  previous  quarter, as well as higher loan impairment allowances. Meanwhile, the 3.5% y-o-y growth in sector net profit was the slowest in 16 quarters but we expect growth  to  pick  up  pace  in  2H2013,  spurred  by  stronger  income  growth and absence of the lumpy loan impairment allowances seen in 1H2013.

- Key takeaways. i) 2QCY13 sector credit cost jumped to 26bps vs 19bps in 1QCY13, although the rise was mainly due to higher lumpy individual impairment  allowances  incurred  by  Maybank.  As  for  the  other  banks under  our  coverage,  credit  cost  continued  to  trend  below  expectations. The  banks  found  no  signs  of  systemic  asset  quality  issues  at  this juncture;  ii)  margins  remained  under  pressure,  with  2QCY13  being  the 11th consecutive quarter that net interest margin (NIM) contracted y-o-y. The main cause of NIM compression was lower asset yields; iii) despite earlier  concerns  over  the  impact  of  rising  bond  yields  on  non-interest income, the overall impact on the banks’ income statement was not too significant.  We believe this was because the bulk of securities holdings were mainly held as either Available For Sale (AFS) or Held To Maturity (HTM)  while  within  the  Held  For  Trading  (HFT)  portfolio,  the  securities held were mainly shorter-dated instruments; and iv) while the targets and KPIs  set  by  the  banks  were  broadly  unchanged,  post  the  2QCY13 results,  we  estimate  that  consensus  estimates  for  2013  and  2014 aggregate  sector  earnings  for  the  banks  under  our  coverage  were lowered by around 1% p.a.

- Investment case. We are maintaining our NEUTRAL call on the sector, with  CIMB  being  our  sole  BUY.  Valuations  are  decent  while  the  recent sharp selldown presents opportunities to buy. 

Source: RHB