Oct 4, 2016

Malaysia’s Banking Stocks

■ Gross impaired loan ratio inched down by 2bp mom to 1.66% in Aug 16.
■ Loan growth eased further from 5.1% yoy in Jul 16 to 4.2% yoy in Aug 16.
■ The drag on loan growth came from further deceleration in the momentum for business loan from 3.7% yoy in Jul 16 to a mere 1.9% yoy in Aug 16.
■ There was an improvement in the leading loan indicators in Aug 16, compared to an 18-20% yoy plunge in Jul 16.
■ Stay Overweight on banks given attractive valuations and better prospects in 2017.

malaysia banking stocks
An unexpected mom decline in GIL…

Despite the market’s ongoing concern about deterioration in banks’ asset quality, the industry’s gross impaired loan (GIL) unexpectedly fell 1.2% mom to RM24.4bn (US$6bn) in Aug 16. This helped to marginally reduce the GIL ratio from 1.68% in Jul 16 to 1.66%
in Aug 16 and increased the loan loss coverage from 88.7% in Jul 16 to 89.6% in Aug 16. In view of the benign YTD trend, we think that the GIL ratio would not be significantly above our projected 1.8% by end-2016.

…but loan growth still heading south

The industry’s loan growth continued to soften, from 5.1% yoy in Jul 16 to a dismal 4.2% yoy in Aug 16, the worst since May 03. The culprit was the unexpected further deceleration in business loan growth from 3.7% yoy in Jul 16 to a mere 1.9% yoy in Aug 16 but we are positive on the sustained pace of 5.7% yoy for the consumer loan momentum. We expect loan growth to recover towards year end due to the potential stimulus from the rate cut. We are projecting 6-7% loan growth for 2016.

Growth in residential mortgages stabilised
Following the downtrend in the past nine months, the growth in residential mortgages, the biggest loan segment with a 31% share of the industry’s total loan in Aug 16, stabilised at 10.1% yoy in Jul-Aug 16. Meanwhile, the business loan momentum was dragged down by the wider contraction of 4.7% yoy for manufacturing loans in Aug 16, vs. a decline of 2.5% yoy in Jul 16. Also, almost all the business loan segments registered weaker growth in Aug 16.

Improvement in the leading loan indicators

We are positive on the strong 19-21% mom recovery in the leading loan indicators in Aug 16. This led to an improvement in the yoy trend – the decline in applications narrowed from 18% yoy in Jul 16 to 1.6% yoy in Aug 16 while approvals inched up by 0.2% yoy in Aug 16 compared to a 19.4% yoy plunge in Jul 16. The improvement mainly came from the better performance in the residential mortgages and auto loan segments.

Maintain sector Overweight

We are encouraged that banks’ GIL ratio remained tame YTD Aug 16, easing concerns of a further increase in credit costs in 2H16. Overall, we remain Overweight on banks, predicated on the attractive valuation and the expected recovery in EPS growth in 2017.

The downside risks for our sector call would be a steep increase in GIL and further deterioration in loan growth. We recently replaced RHB Bank with BIMB as the top pick for the sector.

Aug 16 tracker – an unexpected mom decline in impaired loans

Preference for the sector
Stock-wise, we prefer the following banks for exposure to the sector:
BIMB Holdings – BIMB Holdings is our top pick for the sector as among the Malaysian banks, it will be the only beneficiary of the implementation of EPF’s Simpanan Shariah in 2017, which would increase the inflow of Islamic funds. BIMB is the only listed pure Islamic bank in Malaysia.
The qualities of the stock are reflected by (1) its unrivalled loan growth, (2) one of the best ROE in the sector, (3) strong asset quality – the third lowest gross impaired loan ratio and highest loan loss coverage among the local banks, and (4) swift expansion of non-fund based income,
primarily from the Takaful income.

RHB Bank – RHB Bank is an Add in our books given the potential rerating catalysts of: (1) benefits from the implementation of the IGNITE 17 transformation programme, (2) attractive valuation, (3) cost savings from the career transition scheme materialising from FY16 onwards, (4) gains in market share by its investment banking unit, and (5) the drive for regional expansion in the longer term.

Maybank –
We like Maybank for its size and well-diversified business portfolio. In Malaysia, it is ranked among the top three in almost all the key market segments, including trade finance, credit cards, investment banking and Islamic banking. Its geographical diversification, with exposure to underpenetrated markets, such as Indonesia and the Philippines, also helps to support its earnings growth in the longer term.

The potential re-rating catalysts for the stock are: (1) benefits from the regionalisation of its businesses in various countries, (2) the recovery in earnings contribution from its Indonesia operations, and (3) potential regional expansion of its Islamic banking and insurance businesses in the longer term.

AMMB Holdings – We reiterate our Add recommendation on AMMB Holdings as we expect EPS growth to turn around from a 25.8% decline in FY3/16 to an increase of 3.3% in FY3/17. Other potential re-rating catalysts for the stock include: (1) attractive valuations (FY18F P/E of 9x
and P/BV of 0.8x), and (2) enticing dividend yields of 4-5% in CY16.

Affin Holdings – We still rate Affin an Add given the potential re-rating catalyst of an expected recovery in EPS growth in FY16, arising from the anticipated improvement in loan loss provisioning. According to management, the chunky provisioning for project financing loans in 2015 will not recur in 2016. As such, management guides for a significant improvement in the credit charge-off rate from 44bp in 2015 to only 20bp in 2016. Valuations are attractive, in our view, at FY17F P/E of 7.6x and P/BV of 0.5x.

source: CIMB Research – 30/09/2016