Malaysia Banks Sector - Maintain UNDERWEIGHT
New report: 2Q16 results—Spotlight on asset quality
● 2Q16 results for Malaysian banks were in line to below expectations. Results were weaker than expected for GLC banks with regional exposures due to higher-than-anticipated provisions. None of the banks were able to beat street’s expectations.
● Key positives: (1) Cost efficiency improved for most banks; (2) retail loan asset quality was intact. Key negatives: (1) loan growth missed management targets; (2) the NIM trend was mixed but pressure is expected in the coming quarters; (3) the NOII ratio was lower YoY; and (4) the first signs of material asset quality weakness in domestic non-retail loan segment.
● Headwinds in 2H16: (1) further asset quality weakness that could lead to elevated credit costs; and (2) pressure on NIMs, should there be more interest rate cuts. The market will be looking for further evidence to ascertain if the recent rise in domestic GIL is temporary or the start of a protracted cycle of asset quality deterioration.
● Maintain UNDERWEIGHT on sector. We have UNDERPERFORM calls on MAY and PBK. Prefer CIMB for the improved outlook for its Indonesia operations and cheaper valuations.
Results for Malaysian banks were mostly below expectations. We saw some deterioration in domestic asset quality among certain GLC banks (MAY and RHB) that was mostly concentrated in the corporate/commercial loan segments. Asset quality for retail loans remains healthy. Earlier this year, management teams of banks were expecting some signs of asset quality weakness but as the year progresses, they have been pleasantly surprised that it has held up well so far with the exception of some segments. Given that the primary concern of most investors is asset quality, we believe banks that appear to have comparatively more resilient asset quality should face less selling pressure under current market conditions. MAY and HLB saw core NP decline YoY while core NP for the other banks improved YoY. Results in-line: PBK, AFG, RHB. Results below: CIMB, MAY and HLB.
Key operational highlights
Net earnings weaker YoY. Aggregate net earnings of banks for 1H16 were slightly lower YoY by 5%. While PPOP grew 8% YoY, a sharp rise in LLP by 69% YoY resulted in weaker net profit by 5% YoY. Maybank and HLB were the only two banks that saw core net profit declines YoY, while core net profit for the other banks improved YoY.
Loan growth short of target for all banks. Banks are more focused on preserving asset quality and have tightened credit underwriting standards. Generally, weak corporate loan demand has been the main drag on loan growth. With the exception of the larger retailfocused banks, such as Public and HL Bank (loan growth 6-7%), loan growth for other banks was all <5%. Banks have mostly lowered loan growth targets but expect a pick-up in loan growth in 2H16.
Banks not aggressive on deposit growth. We believe that the modest pace of deposit growth is a reflection of banks’ efforts to curb funding costs and the softer loan growth outlook. GLC banks, such as RHB and Maybank, which have among the highest LDRs of >93%, saw LDR improvements as both banks registered the highest deposit growth of >7% and outpacing loan growth. We noticed an improvement in domestic CASA market share for Maybank (+5.3% annualised) and RHB (+14.4%) vs the system’s 2.7% in 1H16.
NOII ratio lower YoY. The NOII ratio was lower for most banks (except HL Bank) compared to the previous financial year. Fee income growth was sluggish, but better investment and forex income among certain banks helped to enhance NOII. With bond yields trending lower, higher forex volatility and some pick-up in capital market activity, banks are more optimistic on NOII prospects in 2H16. However, the decline in interest rates could have adverse earnings implications for banks with large life insurance operations, such as Maybank and HLFG.
NIM under pressure. Privately owned banks that were among the earlier ones (Public, HL Bank and Alliance) to revise up their lending rates earlier during the quarter experienced more NIM stability. GLC banks suffered more NIM compression domestically due to lower loan yields, but those with overseas operations (particularly Indonesia) benefitted from higher NIMs in those markets. Funding cost was stable to lower and banks mostly agreed that the competitive pressure has eased. All banks expect the July 2016 cut in overnight policy rate (OPR) by 25 bp to adversely affect NIM and most are bracing themselves for a further 25 bp reduction in coming months.
Cost efficiency improves across most banks, as all banks, except PBK and HLB, managed to achieve positive JAWS resulting in lower CIR (cost-to-income ratio). However, having completed a staff rationalisation exercise, HLB should be in a better position to improve CIR in FY17. RHB and CIMB registered the most improvement in cost efficiency, as costs were lower YoY, thanks to staff rationalisation schemes they implemented in 2015. Banks all continue to focus on efforts to further streamline costs.
Domestic asset quality weakens in non-retail segment. Domestic GIL rose for both MAY and RHB due to stress in oil and gas as well as steel loan exposures. Domestic asset quality in the retail loan portfolio was intact. MAY and CIMB experienced asset quality weakness in their Singapore loan portfolio. Provisions were all higher across all banks.
CET 1 ratios of all banks are >11% except for CIMB (at 10.7%). Banks are bracing themselves for the implementation of FRS 9 (provision for expected loss on loans) in 2018 that could lead to an increase in provisions by >30% (based on preliminary estimates).
source: Credit Suisse 05/08/2016