This article first appeared in The Edge Financial Daily on March 8, 2019
Banking sector
Maintain neutral: All eight banks under our coverage posted financial results that were largely in line but then we flag out Affin Bank Bhd, AMMB Holdings Bhd and Malayan Banking Bhd, where their reported numbers came at the upper-end of our estimates.
They booked in lower-than-expected net credit charges along with lumpy recoveries.
Quarter-on-quarter (q-o-q): The sector’s net profit for the fourth quarter of 2018 (4QFY18) grew by 5% despite negative Jaws (tepid income rise of 3% versus (vs) operating expenses [opex] increase of 7%), thanks to the drop in bad loan allowances (-55%).
This was apparent across-the-board, especially Maybank, which saw a drastic 81% decline in loan loss provisions, while Affin and AMMB experienced net write-backs.
Besides, we observed easing net interest margin pressure but in general, non-interest income (NOII) remained weak (-5%) due to challenging capital market climate.
This excludes Maybank’s good NOII (+30%), which is attributed to its insurance business. Year-on-year: Similar to q-o-q, the sector’s earnings grew by 7%. This was lifted by the fall in impaired loans allowances (-54%). Again, we saw the presence of negative Jaws, considering that total revenue contracted 1% while opex ticked up 2%. The drag in total income came from poor NOII performance (-14%).
Loans and deposits continued to expand but with a surprisingly faster clip of 5-7% y-o-y vs 3QFY18’s 4-5%.
The top three fastest growing banks, based on these two categories, were Affin, BIMB, and CIMB (6-13%).
Besides, gross impaired loan ratio improved to 1.87% vs 3QFY18’s 1.93%. However, Affin bucked the trend, seeing a 48-basis-point sequential rise, owing to the deterioration at both its construction and non-residential loan portfolios.
Despite a decent finish to 2018, we reckon consensus could be too bullish on earnings growth over the next two years.
The annual earnings run rate projected by the street for 2019-20 is RM25 billion-RM26 billion, implying a compound annual growth rate (CAGR) of 5.5% (but we are already 1-3% more conservative versus them); this is higher than the five-year historical level of 4.4% and we believe it will be difficult to achieve considering the softer present-day macro climate, which should trickle down to the banking sector.
Thus, we see a downside risk to the sector’s earnings.
Erring on the conservative side, we forecast two-year earnings CAGR of 4.1% for the sector versus our previous estimate of 3.7%. This includes the upward profit revision made on Affin, AMMB, Maybank and RHB during the 4Q18 reporting season.
Without strong growth catalysts and tracking near to the five-year historical growth pace, we find that the current sector valuation is fair since it is also trading close to its corresponding time series mean price to book value of 1.31 times.
Under such context, we reckon stock picking will be more critical than broad sector selection and focus is on value play opportunities and banking stocks with little risk of earnings downgrade by the street.
RHB (target price [TP]: RM6.60) and BIMB (TP: RM5.00) meet all these conditions, making them both “buy” calls. — Hong Leong Investment Bank Research, March 7