The recent 3QCY13 reporting period turned out to be a respectable quarter for the banks, with sector net profit rising 9% q-o-q (+8% y-o-y). While loan growth for most banks were below assumptions and fees as well as investment and trading income fell sequentially, these were cushioned by stable NIMs, stronger insurance/other income, wellcontrolled overheads and lower credit cost. NEUTRAL stance retained.

3QCY13 largely in line. The 3QCY13 reporting quarter saw six out of the seven banking stocks that we cover report results that were in line with our estimates. Affin (AHB MK, NEUTRAL, FV: MYR4.40)’s results, however, beat our expectations due to continued writebacks in loan impairment allowance. Compared to consensus expectations, five of the seven stocks we cover were in line with estimates, Affin’s results were above, and Alliance Financial Group (AFG MK, NEUTRAL, FV: MYR5.15)’s missed estimates due to weaker investment income. In the previous reporting quarter, six banks’ results met our and consensus forecasts, while one disappointed due to weaker-than-expected net interest income. Only two banks we cover declared interim dividends. AMMB (AMMB MK, NEUTRAL, FV: MYR8.35)’s dividends were within estimates but Affin’s interim dividend was better than expected. This was on the back of its stronger earnings as well as higher-than-expected payout ratio of 36% vs our earlier 30% assumption.

Key takeaways. 3QCY13 sector earnings grew by a respectable +9% qo-q and +8% y-o-y. Loan growth continued to trend below targets and our assumptions as domestic corporate lending activities remained muted, while fee, investment and trading income were dampened by lacklustre capital market conditions and tougher trading conditions arising from the threat of QE tapering. Nevertheless, these were more than compensated for, by: i) stable net interest margins (NIMs), supported by liquidity management, ii) tight cost control measures, leading to positive jaws sequentially, iii) better forex and insurance/other income, and iv) lower loan impairment allowances as asset quality improved in 3Q. Post 3QCY13, most banks kept their loan growth targets on expectations of stronger growth ahead, while those with strong investment banking (IB) franchises reported a pickup in IB activities. More importantly, bottomlines and ROE targets were reaffirmed.

Forecasts. We tweaked our earnings forecasts for Affin and CIMB Group Holdings (CIMB MK, BUY, FV: MYR9.50) during the results reporting period but the revisions were not too significant.

Investment case. We remain NEUTRAL on the sector but think banks are well-poised to benefit from the new investment cycle further ahead, underpinned by various economic programmes. Maybank (MAY MK, BUY, FV: MYR11.40), Hong Leong Bank (HLBK MK, BUY, FV:
MYR16.60) and CIMB are our BUYs.

3QCY13 results roundup

The recent 3QCY13 reporting quarter saw six out of the seven banking stocks that we cover report results that were in line with our expectations. Affin’s results, however, beat our numbers. Although its annualised pre-impairment operating profit was 8% below estimates, this was more than compensated for by a net writeback in loan impairment allowance of MYR35m in 9M13 vs our FY13F: MYR76m charge. Compared to consensus, five out of the seven stocks we cover were in line with expectations while Affin’s results were above and Alliance Financial Group (AFG)’s below consensus expectations. AFG’s results were impacted by tougher market conditions, which led to weaker investment income. In the previous reporting quarter, six bank reported results that were in line with our and consensus expectations while, Hong Leong Bank (HLB)’s numbers disappointed due to weaker-than-expected net interest income. Only two banks in our coverage declared interim dividends. AMMB’s dividends were within expectations but Affin’s interim dividend was better than expected. This was on the back of its stronger earnings as well as a higher-than-expected payout ratio of 36% vs our earlier 30% assumption.

Aggregate 3QCY13 net profit increased 9% q-o-q (+8% y-o-y) to MYR5.7bn (vs 2QCY13: +3% q-o-q and y-o-y). While this was partly helped by lumpy income items such as Maybank’s forex gains - as its net USD asset position benefited from the USD’s appreciation against the MYR - we also note several positive underlying trends on a sequential basis. These include stable net interest margin (NIM), overheads that were tightly controlled and lower loan impairment allowances. Y-o-y, sector net profit growth was also aided by recent M&A exercises such as Kurnia, MBF Cards and OSK Investment Bank, but loan impairment allowances were also higher (+205% y-o-y, mainly due to Maybank and CIMB).

Aggregate net interest income was up 2% q-o-q and 5% y-o-y. Gross loan growth moderated to +2% q-o-q (2Q13: +3% q-o-q) due to softer growth in domestic corporate lending experienced by Maybank and AMMB (due to repayments), as well as CIMB (dragged by CIMB Niaga). Lending activities to households and SMEs, however, stayed healthy. Also positive was sector NIM holding stable q-o-q. However, NIM was down 18bps y-o-y largely from pressure on asset yields (-19bps y-o-y).

Sector non-interest income held up well during the quarter (+2% q-o-q; +18 y-o-y) despite lacklustre capital markets. Trading conditions were also tougher amid a rising bond yield environment on expectations that the US Fed would start to taper quantitative easing (QE). As a result, fee income fell 5% q-o-q (+19% y-o-y) while investment and trading income plunged 58% q-o-q and y-o-y. However, these were more than offset by higher forex gains (+65% q-o-q; +123% y-o-y) as well as insurance and other income (+58% q-o-q; +34% y-o-y). Maybank was the main contributor to the higher forex and insurance/other income.

Meanwhile, aggregate overheads were well-controlled, dipping by 1% q-o-q (+7% y-o-y). With that, the sector’s cost-to-income ratio (CIR) improved to 47.4% from 49% in 2QCY13 and 48% in 3QCY12. Overall, sector pre-impairment operating profit rose 5% q-o-q and 10% y-o-y.

As mentioned above, loan impairment allowances were also lower this quarter, down 15% q-o-q (+205% y-o-y) while annualised credit cost declined to 19bps vs 26bps in 2QCY13 (3QCY12: 8bps). The q-o-q drop was mainly due to lower individual allowances (-54% q-o-q; -2% y-o-y) in the absence of lumpy provisions booked in for corporate accounts by Maybank and RHB in the previous quarter. As for the other banks under our coverage, credit costs were largely lower than expected.

Key highlights from results

Below are the highlights from banks’ recent reporting quarter

1)     Loan growth – most banks still fell short of targets, but stronger 4Q expected. Loan growth softened to +2.3% q-o-q (+11.2% y-o-y) vs +3% q-o-q (+10.3% y-o-y) in 2QCY13, mainly attributed to the domestic corporate segment, although this was not too surprising. We had observed from banking statistics that disbursements to businesses, while trending up, had been on a more gradual basis rather than stepped up after the May general election. CIMB also reported weaker corporate loans growth in Indonesia due to its more cautious stance there. This aside, regional corporate lending activities were generally healthy while lending to households and SMEs were also resilient. As a result of the softer momentum, we note that loan growth for several banking groups (eg Affin, AMMB, HL Bank, and Maybank) continued to trend below targets. However, only AMMB guided down its loan growth expectations (to 7% from 10%) while Maybank and HL Bank still expect growth to pick up in the quarters ahead.

2)     NIMs – early signs of stabilisation? As mentioned above, NIMs held steady sequentially. We estimate the average asset yield for the sector rose 3bps q-o-q, offset by a 3bps rise in average funding cost. We also believe NIMs were helped by liquidity management – the sector’s loan to deposit ratio (LDR) rose to 86% at end-Sept 2013 from 85.4% at end-June. With banks typically citing a comfortable LDR range of 85-90%, we think there is still scope for it to go up and alleviate some of the pressure from declining asset yields. We would, however, be more comfortable with respect to the sustainability of NIMs when asset yields start to stabilise and/or funding costs start to ease. Y-o-y, 3QCY13’s NIM contracted 18bps in what is the 12th consecutive quarter that NIM has declined y-o-y. The main cause for the NIM compression was lower asset yields (-19bps y-o-y) as higher yielding loans are rolled off the loan book and replaced by lower yielding loans.

3)     Investment and trading income soften, but largely offset by forex and insurance contribution. Most banks reported sequential declines in investment and trading (includes MTM gains/losses) as well as fee income. With QE tapering just a matter of timing, market conditions may continue to remain challenging for treasury activities. On the flip side, the delay in QE tapering appears to have opened up a window of opportunity for issuances, with some of the banks seeing a pick up in IB activities in 4QCY13. This would help provide some support for non-interest income.

4)     Asset quality improves. Sector absolute gross impaired loans saw a slight improvement, down 1% q-o-q (-2% y-o-y) vs 2QCY13: +1% q-o-q (-5% y-o-y). The sector’s net impaired loan formation also declined to 82bps during the quarter from 94bps in 2QCY13. As such, aggregate individual allowances was significantly lower at MYR306m vs 2QCY13: MYR663m (impacted by lumpy provisioning for corporate loans), but this was partly offset by higher collective allowances (MYR839m vs 2QCY13: MYR719m, although there was some seasonality for the consumer business) and lower recoveries (MYR703m vs 2QCY13: MYR827m). Overall, 3QCY13 sector credit charge-off rate stood at 19bps (annualised), which, in our view, is still low (2QCY13: 26bps; 3QCY12: 8bps). From banks’ feedback, it would seem that asset quality generally remains benign but we believe investors will continue to keep a close watch on developments in Indonesia and, on the domestic front, selected sectors such as the steel industry.

5)     Reining in overheads. The banks exhibited good cost discipline, with 3QCY13 expenses dipping 1% q-o-q while y-o-y, the 7% rise was the slowest pace since 1QCY11. With loan growth slowing down, weaker capital market activities and continued pressure on NIMs, the tight control over costs makes sense.

Aggregate net interest income was up a decent 2.1% q-o-q and 4.8% y-o-y (2QCY13: +1.5% q-o-q; +4.6% y-o-y) but loan growth momentum slackened q-o-q to +2.3% (+11.2% y-o-y vs 2Q13: +3% q-o-q; +10.3% y-o-y). Lending to households and commercial segments were healthy, but partly offset by softer domestic corporate lending activities. The softer loan growth, however, was mitigated by NIMs holding stable q-o-q (-18bps y-o-y).

YTD loan growth generally missed targets and our assumptions. Nevertheless, the banks continued to guide for stronger growth in the quarters ahead. The key driver appears to be the business segment, thanks to stronger demand for loans from corporates as well as SMEs. As mentioned above, we note from banking statistics that loan disbursements to businesses have been creeping up. Disbursements for the months of September and October ranged between MYR56.3bn and MYR57.8bn, up slightly from the MYR54-55bn monthly disbursements between May-Aug and MYR52.5-54bn pre-general election (excluding February’s disbursements). Meanwhile, lending to the household segment has been growing at a stable pace and will continue to be well supported by the country’s young demographic structure, high savings, rising consumerism, favourable labour market conditions and current low interest rate environment, in our view. That said, growth ahead is likely to be dampened by the recent round of property cooling measures.

We expect NIM margins to continue to remain under pressure. Although lending rates in segments such as mortgages appear to be levelling out, average yield will likely remain under pressure as higher yielding loans are rolled off the loan book and replaced by lower yielding loans. Nevertheless, with lending rates stabilising, the NIM compression ahead may not be as severe as that experienced in recent years. A hike in the OPR will help, and we see a possibility of a 25bps hike in 3Q14. We have yet to factor this into our earnings models.

Sector non-interest income (+2% q-o-q; +18 y-o-y) held up well despite softer capital markets and challenging environment for trading activities. Fee income fell 5% q-o-q (+19% y-o-y, but partly due to impact from acquisitions) while investment and trading income slipped 58% q-o-q and y-o-y. These, however, were more than offset by stronger forex (+65% q-o-q; +123% y-o-y) as well as insurance and other income (+58% q-o-q; +34% y-o-y). Both these items were driven by Maybank.

For the full-year, we continue to expect an improvement in non-interest income, which will partly be driven by the full impact of last year’s M&A activities. Also, with more stringent capital requirements coming into place, the banks have been placing more importance on growing non-interest income. Targeted areas include wealth management and transactional banking, but such benefits will only start to be felt over the mid-long term. We think non-interest income growth will be all the more important for banking groups that had undertaken M&A exercises last year, given rising overheads faced due to the full year impact from the consolidation of these businesses as well as potential integration costs.

Overheads were generally well contained during the quarter, down 1% q-o-q while the 7% y-o-y increase was the slowest rate of change since 1QCY11. This was commendable considering the impact from M&A activities that had taken place over the past year. As such, CIR improved to 47.4% from 49% in 2QCY13 and 48.1% in 3QCY12. Overall, sector pre-impairment operating profit rose 5% q-o-q and 10% y-o-y.

Asset quality improved during the quarter with sector absolute gross impaired loans down 1% q-o-q (-2% y-o-y) while the net impaired loan formation rate declined to 82bps (2QCY13: 94bps). Loan impairment allowances were also lower this quarter, down 15% q-o-q (+205% y-o-y) while annualised credit cost fell to 19bps vs 26bps in 2QCY13 (3QCY12: 8bps). Aggregate individual allowances was significantly lower at MYR306m vs 2QCY13: MYR663m (impacted by lumpy provisioning for corporate loans), but this was partly offset by higher collective allowances (MYR839m vs 2QCY13: MYR719m, although there was some seasonality in the consumer segment) and lower recoveries (MYR703m vs. 2QCY13: MYR827m).

Risks

The risks include: i) slower-than-expected loan growth; ii) weaker-than-expected NIMs; iii) deterioration in asset quality; and iv) changes in market conditions that may adversely affect investment portfolio.

Forecasts

We revised down our FY13-14 net profit projections for CIMB by 2-2.5% due to higher-than-expected overheads while we raised our FY13 net profit forecast for Affin by 4% after lowering our credit cost assumption to 11bps from 21bps. Our projections for the other banks were unchanged.

Valuations and Recommendations

Overall, the 3QCY13 reporting period turned out to be a respectable quarter for the banks, with positive growth for income while overheads and loan impairment allowances trended lower sequentially. We keep our NEUTRAL call on the sector for now but further ahead, we think the banks are well poised to benefit from the new investment cycle, underpinned by the various economic programmes. Maybank, HL Bank and CIMB are our BUYs.

Source: RHB