The  recent  4QCY13  reporting  period  was  decent,  despite  sector  net profit  easing  3%  q-o-q  (+8%  y-o-y).  A  pickup  in  loan  growth,  stable sector  NIM  and  an  improvement  in  overall  asset  quality  were  some  of the positives. Looking ahead, we project stable net profit growth for the sector with potential upside from capital markets-related income and/or credit cost staying benign. Maintain OVERWEIGHT.

4QCY13 largely in line. The recent 4QCY13 reporting quarter saw five out of the seven banking stocks that we cover report results that were in line with our and consensus estimates. Affin and Maybank’s results were slightly  ahead  of  both  our  and  consensus  estimates,  on  the  back  of Affin’s  lower-than-expected  credit  cost  and  Maybank’s stronger-than-expected  pre-impairment  operating  profit.  In  terms  of  dividends,  five banks that we cover declared dividends but only Maybank’s dividend surprised on the upside due to its better-than-expected results.

Key takeaways. Aggregate 4QCY13 net profit eased 3% q-o-q (+8% y-o-y) to  MYR5.5bn (vs 3QCY13: +9% q-o-q; +8% y-o-y). Pre-impairment operating profit and operating profit were largely stable sequentially, but contributions  from  associates  were  lower  in  the  absence  of  lumpy income  enjoyed  in  3QCY13.  Positive  trends  were:  i)  a  pickup  in  loan growth  thanks  largely  to  Maybank  (driven  by  domestic  and  Singapore corporate  loans),  ii)  stable  net  interest  margin  (NIM)  as  pressure  on asset yield (-4bps q-o-q) was cushioned by lower average funding cost (-2bps  q-o-q)  and  liquidity  management,  iii)  asset  quality  improved 
sequentially,  which  helped  keep  credit  cost  in  check.  Generally,  the banks’ 2013 credit  costs  were  below  our  forecasts  and  guidance,  but higher  vs  2012  levels,  and  iv)  better  markets-related,  non-interest income.  Meanwhile,  4QCY13  overheads  growth  outpaced  income growth, although this tended to be seasonal (eg year-end spending).

Outlook.  The  larger  banks  guided  for  loan  growth  of  low  double-digit, driven  by  the  domestic  business  segment  as  well  as  overseas operations.  NIM  compression  is  expected  to  be  around  10bps.  Asset quality appears intact, which would help keep credit cost in check, while the fixed income pipeline appears healthy.  

Forecasts. After updating our models for the full-year results, we revise down our FY14F net profit projections for Affin, CIMB and Public Bank by 3-4%, while our FY14F bottomline forecast for Maybank is raised by 2%. Our projections for the other banks are largely unchanged.

Investment  case.  We  remain  OVERWEIGHT  on  the  sector,  as  the banks are well-poised to benefit from an expected pickup in GDP growth this year, underpinned by the various economic programmes. Maybank, Hong Leong Bank (HL Bank) and CIMB are our BUYs.

4QCY13 results roundup

The recent 4QCY13 reporting quarter saw five out of the seven banking stocks that we cover report results that were in line with our and consensus estimates. Affin and Maybank’s results were slightly ahead of both our and consensus estimates, on the back  of  Affin’s  lower-than-expected  credit  cost  and  Maybank’s  stronger-than-expected pre-impairment operating profit.

In  the  previous  reporting  quarter,  six  out  of the seven  banking  stocks  that  we  cover reported  results that were in line with our expectations. Affin’s results  beat  our estimates  due  to  a  net  writeback  in  loan  impairment  allowance.  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 performance was below consensus expectations. 

In  terms  of  dividends,  five  banks  that  we  cover  declared  dividends,  but  only Maybank’s dividend surprised on the upside due to the better-than-expected results.

Aggregate  4QCY13  net  profit  eased  3%  q-o-q  (+8%  y-o-y)  to  MYR5.5bn  (3QCY13: +9% q-o-q; +8% y-o-y). The sequential decline in net profit was mainly due to lower contributions  from  associates  (CIMB  reported  some  lumpy  income  at  the  associate level in 3QCY13), whereas pre-impairment operating profit and operating profit were largely  stable  sequentially.  That  said,  there  were  several  positive  underlying  trends on a sequential basis. These include  a pickup in loan growth,  stable NIM, improved capital  markets-related  non-interest  income  and  lower  loan  impairment  allowances. Y-o-y,  sector  net  profit  growth  was  aided  by  recent  M&A  exercises  such  as  Kurnia, MBF Cards and OSK Investment Bank, but impairment on financial assets and loan impairment allowances were also higher 133% q-o-q and 19% y-o-y. 

Aggregate  net  interest  income  was  up  2%  q-o-q  and  7%  y-o-y.  Gross  loan  growth picked  up  pace  to  +3%  q-o-q  (3Q13:  +2%  q-o-q)  thanks  to  the  corporate  segment, with Maybank reporting a particularly strong +6% q-o-q gross loan growth. Otherwise, lending  activities  to  households  was  broadly  stable.  Also  positive  was  sector  NIM holding  stable  q-o-q  while  y-o-y,  the  pace  of  compression  narrowed  to  10bps, compared with -18bps y-o-y in 3QCY13.

Sector  non-interest  income  held  up  well  during  the  quarter  (+1%  q-o-q;  +15  y-o-y), despite a significant 73% q-o-q drop in forex income reported by Maybank, mainly in the  absence  of  unrealised  forex  gains  from  its  USD  net  asset  position.  This  was cushioned  by  better  fee  income,  higher  investment  and  trading  income  as  well  as stronger forex income reported by CIMB.

Meanwhile,  aggregate  overheads  rose  3%  q-o-q  (+8%  y-o-y),  partly  due  to  some seasonal  spending.  With  that,  the  sector’s  cost-to-income  ratio  (CIR)  inched  up  to 47.9% from 47.4% in 3QCY13, but was lower than 48.8% in 4QCY12. Overall, sector pre-impairment operating profit was flat q-o-q but up 11% y-o-y.

Loan impairment allowances were lower this quarter, down 13% q-o-q (+19% y-o-y) while  annualised  credit  cost  declined  to  14bps  vs  19bps  in  3QCY13  (4QCY12: 14bps).  The  q-o-q  drop  was  mainly  due  to  lower  collective  allowances  (-30%  q-o-q; +69% y-o-y), partly offset by higher individual allowances (+51% q-o-q; +33% y-o-y) booked  in  by  RHB  and  CIMB.  While  loan  impairment  allowances  were  lower sequentially,  impairment  allowances  on  financial  assets  rose  significantly  q-o-q  and y-o-y  to  MYR143m  (3QCY13:  MYR17m;  4QCY12:  MYR61m),  mainly  due  to Maybank. Thus, total impairment allowances for the quarter climbed 8% q-o-q (+33% y-o-y).

For  2013,  sector  net  profit  growth  moderated  to  7%  from  12%  in  2012.  While  loan growth was stronger (11.3% vs. 2012: 10.6%), net interest income was dampened by NIM pressure (-14bps y-o-y vs. 2012: -6bps y-o-y), capping growth to just 5% (2012: +12% y-o-y). 2013 credit cost was also higher at 20bps (2012: 14bps), as charge-off rates  trend  towards  more  normalised  levels.  In  mitigation,  non-interest  income  rose 17%  y-o-y,  helped  by  the  full  impact  from  recent  acquisitions.  Contributions  from associates also surged 44% y-o-y thanks to lumpy income from CIMB’s associate.

Key highlights from results

Below are the highlights from banks’ recent reporting quarter:

1)  NIMs  –  Bottoming  out  or  LDR  management?  NIMs  continued to  hold  steady sequentially  and  had  been  rather  stable  last  year.  Y-o-y,  the  pace  of  NIM compression  for  the  sector  narrowed  to  10bps,  compared  with  18bps  y-o-y  in 3QCY13. Generally, we note that the main cause for the margin pressure was a decline in asset yield, with the average asset yield down 20bps y-o-y in 2013, as higher-yielding loans were rolled off the loan book and replaced by lower-yielding loans.  Average  funding  cost,  on  the  other  hand,  was  down  5bps  y-o-y  vs  2012 due  to  ongoing  efforts  to  grow  low-cost  current  account  and  savings  account (CASA) deposits, in our opinion. It appears that NIMs were also aided by liquidity management – the sector’s loan-to-deposit ratio (LDR) rose to 87% at end-2013 from  86%  at  end-Sep  and  85%  a  year  ago.  With  banks  typically  citing  a comfortable LDR range of 85-90%, we think there is still scope for it to rise and alleviate some of the pressure from declining asset yields. We would, however, be  more  comfortable  with  the  sustainability  of  NIMs  when  asset  yields  start  to stabilise and/or funding costs start to ease. For 2014, the guidance so far points to further NIM contraction this year but the rate of compression may slow down.

2)  Loan  growth  –  Business  lending  and  overseas  operations  to  drive  loan growth. Loan growth gathered momentum in 4QCY13, growing 3% q-o-q (+11% y-o-y) vs +2% q-o-q (+11% y-o-y) in 3QCY13. The pickup in growth was mainly attributed to the corporate segment and, in particular, Maybank, whose +6% q-o-q  expansion  in  loan  base  (led  by  corporate  segment,  both  domestic  and Singapore)  significantly  outpaced  that  of  peers.  The  outlook  for  2014  is  slightly mixed with banking groups such as Maybank and Public Bank guiding for slower loan growth relative to 2013, while CIMB and RHB loan growth targets suggest brighter  prospects  ahead.  However,  what  appears  to  be  common  among  the banks is expectations that the loan growth would be driven by domestic business lending activities (both SME and corporate) as well as overseas operations. The SME  segment  should  benefit  from  a  pickup  in  exports  this  year,  as  well  as  the Economic  Transformation  Programme  (ETP)  projects  filtering  down  the  value chain.  Domestic  consumer  lending,  however,  is  likely  to  moderate  due  to  the various measures put in place to cool the property market.

3)  Asset  quality  improved.  During  the  quarter,  several  banking  groups experienced  an  uptick  in  hire purchase impaired  loans,  but this  was  not  across the  board.  Part  of  the  rise  was  explained  as  being  a  one-off  event  due  to  the adoption  of  more  stringent  classification  criteria  (Public  Bank)  and  teething issues  relating  t  the  rollout  of  core  banking  platform  (AMMB).  That  said,  the banks  did  not  think  this  was  an  indication  of  a  systemic  asset  quality  issue. Overall, sector asset quality improved with  absolute gross impaired loans down 6%  q-o-q  (-4%  y-o-y)  vs  3QCY13’s  -1%  q-o-q  (-2%  y-o-y). The sector’s net 
impaired  loan  formation  was  broadly  stable  at  88bps  compared  with  82bps  in 3QCY13 (4QCY12: 68bps), but recoveries and writeoffs attributed to the decline. As  such,  annualised  credit  cost  fell  to  14bps  vs  19bps  in  3QCY13  (4QCY12: 14bps). In addition, despite concerns regarding asset quality in Indonesia as well as impaired loan incidences within the domestic corporate segment, 2013 credit cost for the banks were largely lower-than-expected, relative to our forecasts and 
guidance.

4)  Stronger  markets-related  income,  but  largely  offset  by  lower  forex.  Sector non-interest  income  held  up  well  during  the  quarter,  notwithstanding  the significant  drop  in  forex  income  reported  by  Maybank  (4QCY13:  MYR240m  vs 3QCY13:  MYR891m)  due  to  lower  unrealised  gains  from  its  USD  net  asset position.  Markets-related  income  improved  in  4QCY13  with  banks  generally reporting higher fee as well as investment income.

Net interest income: Decent growth as NIMs stayed stable

Aggregate  net  interest  income  was  up  a  decent  2%  q-o-q  and  7%  y-o-y  (3QCY13: +2%  q-o-q;  +5%  y-o-y),  on  the  back of  a pickup  in  loan  growth  momentum  q-o-q  to +3% (+11% y-o-y vs 3Q13: +2% q-o-q; +11% y-o-y) while NIM held steady.

Overall,  2013  loan  growth  for the  banks  were  mixed.  Larger  banks  either  exceeded (Maybank) or met (CIMB and Public Bank) loan growth targets, while loan growth for Affin, AFG, AMMB, HL Bank and RHB trended below targets.  As mentioned above, loan  growth  prospects  for  2014  were  mixed  for  the  larger  banks  but  generally, expectations  are  for  low  double-digit  growth.  The  key  loan growth  drivers  appear  to be  the  business  segment,  thanks  to  stronger  demand  for  loans  from  corporates  as well  as  SMEs.  Also,  overseas  operations  such  as  Singapore  and  Indonesia  are expected to post stronger growth relative to domestic operations. Consumer lending is expected to moderate on the back of the various measures that have been put in place to cool down the property market.

As  for  NIMs,  while  margins  appear  to  be  leveling  off,  the  banks  continue  to  expect NIMs  to  remain  under  pressure  for  2014  (~10bps  NIM  compression),  due  to competition  for  both  loans  and  deposits.  With  lending  rates  stabilising,  our expectations  regarding  NIM  compression is  that  the  pace  of  contraction  ahead  may not  be  as  severe  as  that  experienced  in  recent  years.  We  generally  assume  mid-single  digit  NIM  compression  for  2014.  A  hike  in  the  overnight  policy  rate  (OPR) should also help provide a temporary reprieve to NIMs, and we see a possibility of a 25bps hike in 3Q14.

Non-interest income: Resilient as capital market activities picked up

Sector  non-interest  income  (+1%  q-o-q;  +15%  y-o-y)  held  up  well  despite  Maybank reporting  a  sharp  drop  in  forex  income  (4QCY13:  MYR240m  vs  3QCY13: MYR891m), which was well-absorbed by higher fee income and realised gains from sales  of  securities,  as  well  as  higher  forex  income  from  CIMB,  which  management attributed to stronger customer flows.

Overheads: Seasonally higher q-o-q

Overheads were generally well-contained during the quarter, taking into account the typical  year-end  spending  as  well  as  professional  fees  relating  to  a  M&A  exercise. With  the  growth  in overheads  outpacing  income  growth,  the  sector’s  cost-to-income ratio (CIR) inched up to 47.9% from 47.4% in 3QCY13, but was lower than 48.8% in 4QCY12. Overall, sector pre-impairment operating profit was flat q-o-q but up 11% y-o-y.

Credit cost: Down sequentially, as asset quality improved

Sector asset quality improved during the quarter with absolute gross impaired loans down 6% q-o-q (-4% y-o-y) on the back of higher recoveries and writeoffs, while the net  impaired  loan  formation  rate  was  broadly  stable  at  88bps  vs  3QCY13:  82bps (4QCY12:  68bps).  Loan  impairment  allowances  were  also  lower  this  quarter,  down 13%  q-o-q  (+19%  y-o-y)  while  annualised  credit  cost  fell  to  14bps  vs  19bps  in 3QCY13  (4QCY12:  14bps).  Aggregate  individual  allowances  were  higher  at MYR463m  vs  3QCY13’s  MYR306m  (impacted  by  lumpy  provisioning  for  corporate loans),  but  this  was  more  than  offset  by  lower  collective  allowances  (MYR590m  vs 3QCY13: MYR839m) and higher recoveries (MYR769m vs 3QCY13: MYR703m).

Risks

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

Forecasts

We revise down our FY14F net profit projections for Affin, CIMB and Public Bank by 3-4%, mainly on the back of lower margin projections (CIMB and Public Bank) as well as  lower  non-interest  income  expectations  (Affin).  We  raise  our  FY14F  bottomline forecast for Maybank by 2% due to its better-than-expected numbers. Our projections for the other banks are largely unchanged.

Valuations and recommendations

Overall,  the  4QCY13  reporting  period  turned out  to be a  respectable quarter  for  the banks, with positive growth for income on the back of a pickup in loan growth, stable NIMs  and  stronger  capital  market  activities,  while  asset  quality  improved  further, which helped keep credit cost low.

We  remain  OVERWEIGHT  on  the  sector,  as  the  banks  are  well-poised  to  benefit from  an  expected  pickup  in  GDP  growth  this  year,  underpinned  by  the  various Economic  Transformation  Programme  (ETP)  initiatives.  We  see  both  Maybank  and CIMB  as  excellent  proxies  to  the  ETP  and  key  beneficiaries  as  capital  markets improve.  However,  Indonesia’s  challenging  macroeconomic  conditions  remain  a bigger  dampener  for  CIMB  than  Maybank,  as  contribution  from  Indonesia  made  up 30%  of  2013  pre-tax  profit  for  CIMB  vs  7%  for  Maybank.  However,  we  continue  to view any sharp selldown in CIMB as an opportunity to buy. As for Hong Leong Bank, we  expect  growth  to  accelerate  now  that  its  post-merger  restructuring  activities  are largely done.

Source: RHB