Banking sector ‘Overweight’ on unsurprising 2Q17 results


The domestic sector outlook appears to be favourable as lenders’ earnings for the second quarter this year (2Q17) were mostly within expectations, while economic indicators would further push the sector forward.

Affin Hwang Investment Bank Bhd said the absence of negative surprises for the quarterly results, stable net interest margin (NIM) and lower overall credit costs had helped lenders to post strong earnings.

The research house, which had maintained an ‘Overweight’ rating for the sector, forecast earnings would be driven by local consumption and housing needs, infrastructure projects and accommodative monetary policies.

But, Affin Hwang warned that higher overhead costs, new non-performing loans, NIM compression, higher funding costs and weaker loan growth would still shroud the sector.

“We look for earnings estimates for 2017 to 2019 to grow by 10.5% year-on-year (YoY), 4.4% YoY and 3.8% YoY respectively,” the research house said. Its big-cap top picks are Public Bank Bhd as a strong defensive bank and Malayan Banking Bhd (Maybank) for its broad exposure to economic activities and attractive dividend yields.
Mid-cap selections are 
AMMB Holdings Bhd, Hong Leong Bank Bhd (HLBB) and Alliance Financial Group Bhd (AFG).

The banking industry reported a net profit of RM5.7 billion for the April-June period, a 18.7% rise. Normalised 2Q17 net profit of RM5.8 billion was flat quarter-on-quarter (QoQ).

“Overall, earnings for the first half of 2017 (1H17) were in line with our expectation of a full-year net profit forecast of RM24 billion. Except for HLBB, our overall sector earnings forecast changes have been minimal,” Affin Hwang said.

It said fund-based income remained the major earnings driver in the 2Q17 at an average 74% of banks’ total net income.

Banks like CIMB Group Holdings Bhd, Maybank and RHB Bank Bhd which have not been reporting favourable pretax profit due to impairments over the past one year, have started to show a rebound in net profit.

Most banks reported a YoY improvement of between five basis points (bps) to 14bps in 1H17 NIM, except for RHB, which saw its NIM drop 4bps YoY.

Affin Hwang’s key concern over 2Q17 results is mainly in banks’ operating expenses, which have risen 5.4% YoY and 3.8% QoQ, versus the research house’s projection for a flat 2017.

The research house also projects a 21% upside potential for AMMB following the recent sell-down.

“Though AMMB’s share price is still being penalised by the market due to concerns of underlying contingent liabilities and for aborting the proposed merger with RHB, we believe AMMB, with its new management line-up, could actually execute better to achieve its top four agenda in wholesale, small and medium enterprises, and retail banking,” it said.

The research firm also expects stronger growth for HLBB in its financial year 2018 (FY18) up to FY20, as it leverages on ample balance sheet liquidity and easing of funding cost pressure through higher current and savings account growth and repayment of a US$300 million (RM1.26 billion) senior bond.

“We expect its gross loan-todeposit ratio of 80.6% as at June 2017 to increase to circa 82%. Sound asset quality remains another key strength plus its 20%-owned Bank of Chengdu Co Ltd, which we expect to contribute to almost 14% of pretax profit by FY19 from 12% in FY17,” it said.

Most banks are unlikely to experience a sharp dip in return on equity in 2H17, except for AFG and Affin Holdings Bhd, which have transformation plans underway.

Loan growth forecast for the sector is maintained at 6% for 2017 and 2018, and 5.8% for 2019.

However, the research firm cautioned the shift in funding to the bond market could result in subdued growth in the loan market.