The  recent  1QCY14  reporting  period  was  relatively  muted.  Aside  from 1Q being a seasonally slower quarter, loan growth had a soft start while non-interest income was  also subdued as markets-related income was weaker.  On  the  flipside,  costs  were  generally  tightly  controlled  while asset  quality  improved  further.  We  expect  a  pickup  in  lending  and capital market activities ahead. Maintain OVERWEIGHT.

• 1QCY14  results broadly  in line.  The recent 1QCY14 reporting quarter saw six out of the seven ranking stocks that we cover report results that were in line with our estimates. CIMB  (CIMB MK, BUY, FV: MYR8.40)’s results came  in at the lower end of estimates as, apart from a soft start for  non-interest  income,  its  effective  tax  rate  was  also  higher  than expected. Relative to consensus expectations, the seven banking stocks came  in  broadly  within  estimates.  In  terms  of  dividends,  Alliance Financial  Group  (AFG  MK,  NEUTRAL,  FV:  MYR4.95)  surprised  with  a special DPS of 10.5 sen, bringing its total net dividend payout ratio for FY14 to 81% (vs up to 50% dividend payout policy).
• Key  takeaways.  Net  interest  margins  (NIM)  stayed  under  pressure. While  loan  yields  have  stabilised,  deposit  competition  is  rising.  So  far, muted  loan  growth  and  liquidity  management  means  that  the  banks, especially  bigger  ones,  did  not  need  to  be  too  aggressive  in  depositgathering activities. This may change ahead if loan growth picks up pace as loan-to-deposit ratios (LDR) for some banks are at or close to optimal levels. A  rate hike in 2H14 should help provide some near-term reprieve to  NIMs.  Apart  from  that,  1QCY14  non-interest  income  was  subdued mainly  due  to  softer markets-related  income.  Overheads  remain tightly controlled  with  operating  efficiency  being  one  of  the  key  levers  for bottomline growth. Also, asset quality generally improved, which helped keep credit cost low. Feedback from some of the banks is  that a 25bps hike in the overnight policy rate is unlikely to hurt asset quality.
• Outlook.  2014  guidance  by  the  banks  was  kept  intact  on  the  back  of expectations  that  lending  and  capital  market  activities  would  pick  up ahead.  Maybank  (MAY  MK,  BUY,  FV:  MYR11.30)’s  management already said that it has noted an improvement in capital  market activities in 2Q.
• Forecasts.  After updating our models for the full-year results  (AFG  and AMMB  (AMM  MK,  NEUTRAL,  FV:  MYR8.00))  and  housekeeping (CIMB), our projections for the other banks are unchanged.
• Investment  case.  We  remain  OVERWEIGHT  on  the  sector,  as  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 (HLB MK, BUY, FV: MYR16.40) and CIMB are BUYs.

1QCY14 Results Roundup

The recent  1QCY14  reporting quarter saw  six  out of the seven banking stocks that we cover report results that were in line with our estimates. CIMB’s results came in at the  lower  end  of  estimates  as,  apart  from  a  soft  start  for  non-interest  income,  its effective tax rate was also higher than expected. Relative to consensus expectations, the seven banking stocks we cover came in broadly within estimates.

In the previous  4QCY13  reporting quarter,  five out of the seven banking stocks that we cover reported  results that were in line with our  and consensus estimates. Affin (AHB MK, NEUTRAL, FV: MYR3.76)  and Maybank’s results were slightly ahead of both our and consensus estimates,  on the back of the former’s  lower-than-expected credit cost and Maybank’s stronger-than-expected pre-impairment operating profit.

In  terms  of  dividends,  two  banks  that  we  cover  declared  dividends.  AMMB’s  final dividend was in line with expectations but AFG surprised with a special DPS of 10.5 sen,  bringing  its  total  net  dividend  payout  ratio  for  FY14  to  81%  (vs  up  to  50% dividend payout policy).  Moving forward,  AFG  has adopted a dividend policy to pay out up to 60% of earnings.  This was made possible thanks to its comfortable  capital level - CET-1 ratio for the banking group was 10.4% (after dividends).

Aggregate 1QCY14  net profit eased 3% q-o-q (+1% y-o-y) to MYR5.4bn (4QCY13: -3% q-o-q; +8% y-o-y). The sequential decline in net profit was  not surprising as 1Q tends  to  be  a  seasonally  slower  quarter.  Apart  from  that,  non -interest  income  was also weaker, cushioned by lower overheads. Y-o-y, excluding  CIMB’s MYR315m net gain from the sale of CIMB Aviva and restructuring costs, pre-tax profit would have been up a decent 7% vs the reported growth of 3%.  Overall, it was a relatively muted reporting quarter for the banks. Aside from  seasonality, loan growth had a soft start (mainly corporate segment, impacted by repayments) while non -interest income was also  subdued  as  markets-related  income  was  muted.  On  the  flipside,  costs  were generally  tightly  controlled  while  asset  quality  improved  further,  resulting  in  banks reporting credit cost that were lower than assumptions.

Aggregate net interest income was up 4% y-o-y  but flat q-o-q. Gross loans  rose 11% y-o-y  (+2%  q-o-q  vs.  4Q13:  +11%  y-o-y/+3%  q-o-q),  partly  offset  by  an  estimated 9bps compression in sector NIM (-6bps q-o-q) with average asset yields down 10bps y-o-y (-5bps q-o-q) while the average funding cost was estimated to have been stable y-o-y and q-o-q.  Annualised loan growth was just 8% as the corporate segment was impacted by repayments. Nevertheless, the banks appeared optimistic that lending activities should gather momentum ahead, underpinned by  acceleration  in big-ticket Economic Transformation Programme (ETP) projects.

Sector non-interest income  slipped 5% y-o-y (-17% q-o-q), excluding the MYR515m gain  from  disposal  of  CIMB  Aviva  in  1Q13.  This  was  mainly  attributed  to  weaker markets-related  income  (equities  and  treasury).  AMMB  also  reported  weaker contribution  from  insurance  (mainly  life  insurance)  while  HL  Bank  had  a  one-off reclassification exercise where it now reports credit card fees on a net basis (ie less related expenses) to be in line with the disclosure by peers.

Meanwhile, aggregate overheads  inched down 1% y-o-y  (-6%  q-o-q),  excluding the MYR200m  restructuring  costs  incurred  by  CIMB.  The  banks  generally  continue  to keep  a  tight  rein  on  cost.  With  operating  income  muted,  variable  expenses  were lower as well.

Thus, the sector’s underlying cost-to-income ratio (CIR) improved to 48% from 49.5% in 1QCY13 (4QCY13: 47.9%).  Overall, underlying pre-impairment operating profit  for the sector was up 5% y-o-y but down 6% q-o-q. Loan impairment allowances were slightly higher this quarter (+5% y-o-y; +1% q-o-q) but  overall,  annualised  credit  cost  still  stood  at  a  low  17bps  (1QCY13:  19bps; 4QCY13:  14bps).  Absolute  gross  impaired  loans  declined  6%  y-o-y  and  1%  q-o-q with  most  banks  reporting  an  improvement  in  asset  quality.  Maybank  was  the exception, reporting a 4% q-o-q rise in absolute gross impaired loans (-9% y-o-y) with the uptick due to two domestic legacy accounts and some corporate accounts from the coal and plantation sectors in Indonesia. 

Key highlights from results

Below are the highlights from banks’ recent reporting quarter:
i.  NIM pressure – from asset yields to funding costs. Sector NIM fell 10bps y-oy and 6bps q-o-q, although the q-o-q trend tends to be seasonal due to the fewer number of days in 1Q.  By our estimates, average sector yield fell 10bps y-o-y (-5bps  q-o-q)  while  average  funding  cost  was  stable  y-o-y  and  q-o-q.  The continued downward pressure on average asset yield (mainly loan yields) is not too  surprising,  as  a  result  of  ongoing  portfolio  rebalancing.  Lending  yields, however, have been rather stable for the past few quarters now and we note that the compression in average asset yield in 1QCY14 is significantly lower than the 19bps y-o-y decline in 2013.

While  stable  loan  yields  have  been  a  positive,  banks  are  increasingly  seeing upward pressure on funding costs. Thus far,  we gather  that the pressure stems end of the quarter. We also believe part of the funding cost pressure is due to overseas  operations,  especially  for  banks  with  operations  in  Indonesia.  From Figure 6  (on  page 4), we note that the individual banks generally saw funding costs  rise  y-o-y.  As such,  the  banks have  resorted  to  liquidity  management  to help cushion NIM pressures, with most banks  now  operating at a higher LDR,compared  to  a  year  ago  (please  see  Figure  7  on  page  4).  Banks  with  solid deposit franchises also appear more willing to operate at the upper end of their LDR comfort range, eg Maybank – where the LDR has been at the top end of the 85-90%  LDR  guided  range.  This  quarter,  CIMB  allowed  its  LDR  to  run  up  as well. The rise came mainly from the domestic business as management believes CIMB should have no problems raising deposits when the need arises, given its strong local deposit franchise.

Going forward, we expect competition for deposits to remain keen, given that the LDRs  for  the  larger  banks  are  already  at  the  top  end  of  guided  levels  and, especially, if loan growth picks up  pace.  That said, a hike in the overnight policy rate (OPR) should provide some near-term relief  to NIM pressure. We expect  a 25bps hike in the OPR in late 3Q14.

ii.  Loan growth –  business lending to pick up pace.  Loan growth  was muted in 1QCY14, rising  2% q-o-q (+11% y-o-y) vs +3% q-o-q (+11% y-o-y) in  4QCY13. The  corporate  segment  had  a  slow  start,  with  repayments  curbing  growth. Nevertheless,  the soft  start to  the  year is  rather similar  to a  year ago  and  the banks remain optimistic that domestic business lending activities should continue to benefit from the ongoing rollout of  ETP projects. Domestic consumer lending was broadly resilient in 1QCY14, aided by drawdowns from loan pipelines, we believe.

iii.  Weaker  markets-related  income,  but  some  improvement  in  2Q.  Capital markets-related as well as treasury income was softer this quarter. For example, realised  gains  from  the  sale  of  securities  fell  55%  y-o-y  (-13%  q-o-q). Nevertheless, expectations are for an improvement ahead. Maybank said it has already noticed an improvement in capital markets in 2Q. Banks that we expect to benefit from an improvement in capital markets include Maybank, CIMB and AMMB.  Banks  such  as  AFG  and  HL  Bank,  apart  from  the  abovementioned banks,  also have active treasury teams and could stand to benefit from better opportunities in the fixed income space.

iv.  Operating efficiency  –  leverage to bottomline growth.  As mentioned above, tight  cost  control  was  a  positive  takeaway  this  quarter.  This  was  important, especially  given  the  softness  in  operating  income.  Going  forward,  we  would expect a pickup in variable spending  (eg personnel cost, marketing expenses) should  income  levels  trend  higher  but  on  the  whole,  improved  operating efficiency  is  generally  one  of  the  key  levers  cited  by  banks  to  drive  earnings ahead.

v.  Asset quality improved.  Asset quality improvement was another positive. With the  exception  of  Maybank,  the  other  banking  groups  saw  a  sequential improvement  in  asset  quality  or,  at  worst,  stable  impaired  loans.  Sector  net impaired loan formation was also lower at 74bps vs 88bps in 4QCY13 and 93bps in 1QCY13. As such, sector annualised credit costs were kept low at 17bps while credit costs  for the individuals banks were below guidance. Looking ahead, the banks remained mindful of the rising inflation levels and the impact this will have on the lower income group. Also, recoveries are  tapering off, which should lead to  higher  credit  costs  ahead  as  well.  Thus,  credit  cost  guidance  remains unchanged. The banks also do not expect a 25bps hike to impact asset quality but a sustained rise could be cause for concern.

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 update  our FY15F projections for AFG and AMMB following the release of their full-year numbers. We also  lower  our FY14F-15F net profit projections for CIMB by 4% per annum  after raising  our effective  tax rate assumption to 24.5% flat from 21% per  annum,  in  line  with  its  1Q14  results.  Our  forecasts  for  the  other  banks  were unchanged.

Valuations and recommendations
Overall,  1QCY14  was  a  relatively  muted  quarter  but  given  seasonal  patterns  and expectations of a pickup in lending as well as capital market activities ahead,  we do not  expect  major  revisions  to  earnings  from  the  consensus  at  this  juncture.  2014 targets for the various banks were unchanged as well.

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  ETP initiatives. We see both Maybank and CIMB as excellent proxies to the ETP and key beneficiaries as capital markets improve. As for HL Bank, valuations are decent. NIM pressure has been kept in check as the group has stayed disciplined  in pricing for deposits while asset quality is still among the best in its class.

Source: RHB