AmWatch - Banking Sector : 2Q results weighed down by non-interest income NEUTRAL, 3 Sep 2014

SECTOR FOCUS OF THE DAY

Banking Sector : 2Q results weighed down by non-interest income          NEUTRAL

Two banks surpassed expectations in 2Q. For the 2Q results season, there were only two banks whose performance came in above expectations – Hong Leong Bank (HLBB) and RHB Capital (RHB Cap).  Sector net earnings continued to decline on a QoQ basis, for the third consecutive quarter. Net earnings came off by 1.0% QoQ in 2Q14, albeit slightly better than the 3.3% QoQ drop recorded in 1Q14. The latest quarter’s earnings were largely affected by slower capital markets and higher cost of deposits. Non-interest income contracted for the second consecutive quarter (2Q14: -5.2% QoQ, 1Q14: -16.1% QoQ). This is due to ongoing impact from slower capital markets, which affected realisation of investment bank mandates. The generally slower corporate loans segment also reduced fee income on loans. Credit costs remained at historically low levels of only 15bps in 2Q14. Total gross impaired loans for the banks was seemingly better on a QoQ basis, as there was ongoing reduction in the sector’s impaired loans by 5.8% QoQ. However, the improvement was driven mainly by write-offs. The average gross impaired loans ratio for the banks we track was sustained at 1.8% in 2Q14, vs. 1.8% in 1Q14. Sector credit costs came off to only 15bps in 2Q14, from 17bps in 1Q14, mainly due to the absence of fresh corporate impaired loans for Maybank. Maintain NEUTRAL. Our sector net earnings growth assumption is broadly unchanged at 2.8% for 2014 and 12.6% for 2015. Our top picks are now HLBB and CIMB.     

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