AmWatch - Banking Sector : Glitches at the halfway mark NEUTRAL, 4 Sep 2015

SECTOR FOCUS OF THE DAY

Banking Sector : Glitches at the halfway mark     NEUTRAL

Of the seven banks we follow closely, four banks’ performances were below expectations, while two were in line (PBB and RHB Cap). HLBB performed slightly above expectations. Sector net earnings remained flat for a second consecutive quarter, with a minor +0.7% QoQ movement. Revenue was supported mainly by the net interest income line in 2Q15, while there was ongoing contraction in the non-interest income line, due to subdued capital market activities.Total gross impaired loans – from a bottom-up approach for the banks we cover – rose at a larger rate of 5.1% QoQ in 2Q15, if compared to 1.0% QoQ in 1Q15. This was due mainly to higher impaired loans in regional operations in Thailand, Indonesia and Singapore. Malaysia operations’ impaired loans were largely stable. We estimate stable sector credit cost of 29bps in 2Q15, compared to 30bps in 1Q15.

In terms of revenue assumption, our sector loans growth assumption from a bottom-up approach is now 7.7% for calendar year 2015 and 7.2% for calendar year 2016. Our sector NIM assumption is revised to -16bps (from -7bps previously) YoY for 2015, and -6bps YoY for 2016. Our non-interest income growth assumption is 9.2% for 2015, and +2.4% for 2016. Our sector net earnings growth assumption is now 3.3% for 2015, and 5.4% for 2016. Earnings growth of 5.4% for 2016 is distorted by one-off restructuring costs for CIMB, which we estimate amounts to RM650mil and contributing to a low base effect in 2015. Thus, excluding the one-off restructuring forecasts, we estimate normalised net earnings growth of 2.9% in 2016. 

In terms of credit costs forecasts, we are now projecting a higher sector credit cost of 37bps in 2016, from 26bps for 2015. This is to reflect the potential knock-on contagion effects from the recent macro uncertainty. The key banking industry indicators we are watching out for are deposit growth, LDR, and liquidity. Aside from this, the positive indicators to watch for are stabilisation in macro economic data. We remain NEUTRAL on the sector.

QUICK TAKES

Malakoff Corporation : Award of PDP’s arbitration announced  BUY

Construction Sector : LRT 3 PDP award by next week?    OVERWEIGHT

NEWS HIGHLIGHTS

SapuraKencana Petroleum : SapKen refinances debt

AirAsia Bhd : CEO: AirAsia India to be profitable next year

Bursa Malaysia : Fund-raising activities to slow down this year