Banking Sector : 1Q17 Earnings Report Card: Improving trend in provisions OVERWEIGHT

SECTOR OCUS OF THE DAY

Banking Sector : 1Q17 Earnings Report Card: Improving trend in   provisions  OVERWEIGHT

               

All 7 banks’ earnings met expectations. 1Q17 sector core earnings rose by 6.1%QoQ and 147%YoY. On a year-on-year basis, the improvement in core earnings was attributed to higher operating income (rise in net interest, non-interest income and Islamic banking income) and lower provisions for loans losses. The results of Maybank, Public Bank, RHB Bank, Hong Leong Bank, CIMB and AFG all came in within our expectation while AMMB’s earnings met consensus estimate.Loan growth picked up momentum while sector NIM expanded by 5bps QoQ. Aggregate sector's loan expanded 8.0%YoY in 1Q17, a faster pace compared to 6.0%YoY in 4Q16.

JAW turned negative for the sector with an increase in CI ratio in 1Q17. Sector operating expenses (OPEX) rose by 4.5%QoQ. Against a core operating income growth of -1.6%QoQ, the sector’s JAW turned negative with a higher CI ratio of 48.4% in 1Q17 vs. 45.5% in 4Q16. Uptick in sector gross impaired loan (GIL) ratio. 1Q17 saw an uptick in the sector's GIL ratio to 2.00% from 1.97% in 4Q16. This was contributed by the impairment of oil & gas sector loans in Singapore and business banking loans in Malaysia for Maybank. Also, contributing to the increase was the impairment of non-residential property loan for AMMB and upticks in impairment of mortgage and working capital loans for Hong Leong Bank.

Calendarised sector core earnings growth for CY17/18 raised to 8.6%/10.0%. We have revised upwards our CY17/18 earnings growth expectation for the sector to 8.6%/10.0% from 6.4%/8.2% previously after imputing higher NIM and NOII estimates from an improved outlook in capital market activities. Keeping our BUY calls on RHB Bank (FV: RM6.00/share), Public Bank (FV: RM22.30/share) and Hong Leong Bank (FV: RM15.20/share).

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