AmWatch - Banking Sector : 1Q results conclude with two major uncertainties, 2 June 2015

SECTOR FOCUS OF THE DAY

Banking Sector : 1Q results conclude with two major uncertainties         Neutral

The 1Q results kicked off with almost all the banks that we cover recording earnings below expectations. Net interest margin (NIM) continued to decline, by 6bps n 1Q15, which is comparable to the 5bps QoQ contraction registered in 4Q14. The contraction in NIM is again attributed to rising cost of deposit. Most banks hinted at ongoing intense competition for the retail fixed deposit segment, which was attributed to the industry’s compliance with the new liquidity requirement that will kick-in in the middle of 2015. However, in terms of wholesale deposit, banks are now alluding that there is now lesser competition from the corporate deposit segment, as requests for better rates towards the end of quarter closing had largely dissipated.

Key new information in this quarter was the lowered guidance for NIM, as well as uncertainty over asset quality. Our sector net earnings growth assumption is now 11.5% for 2015F, from a low base in 2014. This is broadly unchanged from the 11.0% forecast three months ago. However, we expect to fine-tune our forecasts ahead mainly for NIM. Some banks are now guiding for greater NIM compression due mainly to ongoing competitive pressure on deposit, with NIM guidance being brought down to as much as -20bps YoY, from -10bps YoY previously.

Sector credit cost is estimated at 30bps in 1Q15, not much changed from 4Q14’s 33bps. Our sector credit costs assumption is 26bps for 2015F. However, we may review our credit costs assumptions ahead, as banks provide further clarifications on the impact of the guideline on rescheduled and restructured loans. Most expect some impact on gross impaired loans. We believe there are likely to be some changes to loan loss provisioning, despite adequate collaterals and consequently, insignificant impact from individual assessment provisioning expenses. All in, the unexciting 1Q results season ended with two major uncertainties – i.e. net interest margin (NIM) and asset quality, in our view. We remain NEUTRAL.

Others :

EconWatch : Malaysia attracts FDI for manufacturing and services sectors in 1Q15

NEWS HIGHLIGHTS

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