This article first appeared in The Edge Financial Daily on December 11, 2018
Banking sector
Maintain neutral: The banking sector reported a third quarter of 2018 (3Q18) core net profit of RM6.37 billion, up +1.3% year-on-year (y-o-y) and was a rebound of 3.3% quarter-on-quarter (q-o-q). We saw more positives in 3Q18 versus 2Q18, even though non-interest income continued to decline q-o-q and y-o-y. Fund-based income sustained a marginal growth y-o-y and q-o-q (+1.6% y-o-y). Net interest margin pressure eased as well on a q-o-q basis, though the pressure mounted for some banks. Provisions for most banks were gradually inching up q-o-q in 3Q18 except for Malayan Banking Bhd (Maybank), with the cumulative nine months of 2018 (9M18) trend down 21% y-o-y. In our recent market strategy, we have downgraded the banking sector from “overweight” to “neutral” due to rising headwinds
The Malaysian banking 3Q18 sector net profits came in at RM6.4 billion (+3.5% y-o-y; -9.2% q-o-q), while normalised net profit grew +1.3% y-o-y and +3.3% q-o-q excluding disposal gains. The sector’s 9M18 core net profit of RM20 billion was within our expectations, accounting for 75.7% of our 2018 estimate banking universe’s net earnings projection of RM26 billion (prior to a -3.1% revision). We have adjusted down our earnings forecasts for Hong Leong Bank (-9.1% for calendar year 2018 estimate [CY18E) and Public Bank (-3.2% CY18E) during the reporting period, while our forecasts and rating for RHB Bank have been upgraded to “buy”. CIMB and Maybank’s earnings per share forecasts were revised down before the 3Q18 results announcement.
The sector’s drivers for 3Q18 were no different from those in 2Q18, underpinned by 3Q18 fund-based income (+1.6% y-o-y; +1.5% y-o-y) as sequential net interest margin pressure eased, though the average 9M18 NIMs were down about two basis points y-o-y to 2.28%. Meanwhile, non-interest income continued to disappoint y-o-y and q-o-q due to weak investment results. On provisions, the 9M18 provisioning trend continued to improve, down 21% y-o-y.
We reaffirm our “neutral” rating on the sector, trading at a 2019 estimate price-to-book value (P/BV) multiple of 1.3 times versus the past 10-year average of 1.52 times and the past five-year average of 1.4 times. Our top picks are Maybank (MAY MK, RM9.40, Buy, TP: RM11.20 based on a 1.6 times 2019 estimate target P/BV) — still an aggressive player in the banking and capital markets; and Aeon Credit Service (ACS MK, RM15.52, Buy, TP: RM18.40 based on a 13 times CY19E target price-earnings), whereby we are more positive about its outlook driven by firmer receivables yield and value-chain transformation initiatives. Upside and downside risks are funding cost easing and pressure, and a stronger as well as a weaker loan growth. — Affin Hwang Capital, Dec 10