This article first appeared in The Edge Financial Daily on December 20, 2018

Banking sector
Maintain neutral: With seven in-line estimates, two (BIMB Bank and RHB Bank) were above estimates with only CIMB Bank below estimates due to weak fee-based income, below target loans and downside pressure on net interest margin (NIM), mostly from Indonesia.

Both BIMB and RHB benefited from lower-than-expected impairment allowances supported by higher-than-expected financing (BIMB) and better-than-expected NIM and Islamic banking income (RHB).

Quarter-on-quarter (q-o-q), NIM widened slightly by +2 basis points (bps) to 2.24% (versus five-year high of 2.43% in third quarter of 2013 (3Q13) led by BIMB (+24bps) due to better repricing of assets with cost of funds stable.

Overall, the industry saw little traction in NIM due to deposit intakes still intensive and absence of further rate hike as seen in January 2018.

Downside pressure on NIM seems abated ahead with the deferment of compliance to the net stable funding ratio until 2020 with some banks likely to review their strategy of shoring their deposits as seen in first half of 2018.

However, we still see compression ahead as banks will face competition in shoring their low-cost funding via small- and medium-sized enterprise traction.

Cost-to-income ratio (CIR) improved by falling 20bps to 46.6% q-o-q. Both Maybank and MBSB Bank saw upticks in CIR due to establishment costs (Maybank) and transition into a fully banking platform (MBSB) but still within guidance for both.

Overall, the industry saw lower CIR as top-line outpaces expenses.

Year-on-year (y-o-y), CIR fell (-155bps) for the third consecutive quarter. We view the industry will still see disciplined cost management ahead in light of challenging earnings.

Asset quality continues to improve, with gross impaired loan ratio (GIL) falling by 2bps q-o-q and 11bps y-o-y to 2.12%.

While GIL has been above the 2% mark since 2Q16, we believe GIL will trend downwards on account of the stable economy domestically and across the region which will augur well for both business and households.

However, we do not discount volatility on energy prices, which will impact those assets which are tied to the sector.

Those that will be impacted by the volatility will likely be from CIMB, Maybank and RHB. Overall, the banks’ common equity tier 1 (CET1) ratios are still comfortably above the regulatory requirements of 7% (4.5% equity capital + 2.5% capital conservation buffer.

Judging by Bank Negara Malaysia’s first half of 2018 Financial Stability Report, the central bank seems satisfied with the improving asset quality and the current CET1 and Capital (industry capital ratio at 17%) ratios.

We opine that the central bank does not see a major shock in the system in the short term. — Kenanga Research, Dec 19