AmWatch - Banking Sector : Prolonged cycle of earnings uncertainty NEUTRAL, 29 Jul 2015

SECTOR FOCUS OF THE DAY

Banking Sector : Prolonged cycle of earnings uncertainty               NEUTRAL

During our latest company visits, some banks have started to indicate that industry credit costs are likely to move up to a new normalised level of 40bps next year, from a normalised level of 30bps this year. Historically, credit costs usually start to increase in six months to a year after a slowdown in growth. This was the case during the 2008/2009 external financial crisis when credit costs peaked about six to nine months later at 107bps in mid-2009. Given that a crisis scenario similar to that in 2008/2009 is unlikely, we believe that credit costs may not reach the average of 60-70bps seen in 2008/2009. However, arguably a normalised credit costs of 40bps may seem unusually benign, in terms of historical experience, given the slowing exports growth, soft deposit growth, and tighter liquidity for the industry. Assuming credit costs of 50bps, there is further downside for all the banks, with the following potential fair values – AFG (RM4.10/share); CIMB (RM5.00/share), HLBB (RM12.30/share), Maybank (RM8.40/share), PBB (RM16.50/share), and RHB Cap (RM7.10/share).

In terms of sector net earnings growth, we estimate a lower net earnings growth of 4.0% for 2015, compared to consensus’ 6.1%, for 2015. As for 2016F, our sector net earnings growth assumption is now 10.1%, while consensus estimate is 10.8% growth. Sector net earnings is skewed upwards in 2016 due to the low base effect for CIMB, and this is largely due to one-off restructuring costs which are expected to be fully provided for in FY15F. Without the large one-off restructuring costs, our core net earnings growth for 2016 works out to be a lower 6.7%. If sector credit costs moves up to 50bps, our sector net earnings growth is estimated to decelerate to 2.8% YoY. The indicators to watch for ahead, in our view, are deposit growth, industry LDR, and liquidity – all of which have been relatively muted. Aside from this, we believe oil price, exports and GDP growth may be three macroeconomic indicators that may influence banks’ share prices in this current cycle. We remain NEUTRAL on the sector.  

Others :

British American Tobacco : A decent 1HFY15        HOLD

Malaysia Marine & Heavy Enginerring  : 2Q: Marine business supports earnings HOLD

               

               

NEWS HIGHLIGHTS

Malaysia Airport Holdings : Only 2.3% of klia2 area affected by settlement

Mah Sing Group : Confirmation date for proposed land extended

Automotive Sector: Malaysian Automotive Association lowers vehicle sales outlook

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