M&A Securities Sector Update: Banking PP14767/09/2012(030761) Wednesday, June 08, 2016 Banking Sector (Neutral) Higher Assets Yield Offers Brighter Income Prospects Banking sector underperformed in 1Q16 as banks posted lower earnings as well as weak loans growth of 6.4% vs. our estimates of 7.5% in 2016, derailed by continuous weaknesses in household loans and slower acceleration in business loans. Given the sluggish environment, we downgrade our loans growth target in 2016 to 6.8% but we reiterate our NEUTRAL call. Two biggest issues namely lethargic loans growth and tight liquidity condition may take the spotlight in 2016. Though we expect flat earnings performance for banking sector in 2016 but there are still drivers which could support the sector namely 1) improvement in asset quality and 2) leaner operating cost. Our Top Picks for banking sector are Public Bank (TP: RM21.38) and BIMB Holdings (TP: RM4.28). 1Q16 results summary. 1Q16 earning performance came in weaker, with earnings dropping 5.9% y-oy, impacted by lower NOII and elevated loans loss provision. On the bright side, NII and NIM were enjoying the good run given the revised base rate starting January 2016 that helped bank s total income from further deceleration. All banks under our coverage reported earnings in line with ours estimates as we had revised lower our earnings at the end of 2015. As a whole, cumulative earnings under our coverage fell 2% y-o-y in 1Q16 punctured by both NOII and elevated loan loss provision. Table 1: Reported Net Profit AFG 126 93 122 135 136 130 AMMB 417 519 340 383 300 280 CIMB 200 580 640 804 826 824 Maybank 1,931 1,700 1,585 1,899 1,652 1,427 Public Bank 1,254 1,172 1,197 1,201 1,492 1,230 RHB Capital 486 476 525 194 316 552 Total 4,415 4,540 4,408 4,616 4,722 4,443 Acronym AFG Alliance Financial Group NIM - Net Interest Margin AMMB AMMB Holdings Bhd NII Net Interest Income CIMB CIMB Group Holdings Bhd NOII Non-Interest Income Maybank Malayan Banking Bhd CTI - Cost to Income Ratio RHB RHB Capital Bhd LDR Loan to Deposit Ratio PBB - Public Bank Bhd CASA Current & Saving account 03-22821820 ext. 257, 221, 260, 1
Financial Index. Financial index recovered in 1Q16, rebounding from a testy period in 2H15, lifted by various positive catalyst. YTD KL Financial Index advanced by 606.9 points or 4.2% in 1Q16 and outperformed the FBMKLCI index that jumped by only 1.4% in 1Q16. The performer was contributed by AFG (+16.6%), MAYBANK (+7.4%) and CIMB (+6.8%). Loans growth still soft. Aggregate loans growth for banks under our coverage in 1Q16 was seen tapering with aggregate loans further declined by 1.8% q-o-q. Three banks posted negative growth on q-o-q basis, while the rest churned modest growth. The uninspiring growth in 1Q16 was led by both household and business segment with growth of 0.9% and -0.4% vs. 2% each in 1Q15. On y-o-y basis, growth in 1Q16 was expected if we compare the growth in 1Q15 as 1Q would usually record strong quarter due to festivities effect on the household segment. Nevertheless, certain segments in the households and business segment still enjoyed respectable growth due to continuous demands in the market, such as residential property, personal use in household segment, and construction in the business segment. YTD (until April) residential property loans grew 3.1% while construction segment jumped 2.8% YTD. Table 2: Y-o-Y Gross Loan Growth Company Year Ended Sept-14 AFG March 15.5% 16.2% 14.7% 12.5% 10.2% 8.5% 4.9% AMMB March 0.9% -2.1% 1.6% -2.2% 0.1% -0.7% 0.1% CIMB Dec 9.8% 13.2% 12.4% 16.1% 19.3% 12.5% 7.1% Maybank Dec 14.3% 13.4% 14.3% 15.6% 20.1% 12.3% 5.7% PBK June 9.8% 10.8% 11.7% 11.5% 12.9% 11.6% 9.5% RHB Cap Dec 11.9% 17% 13.7% 9.2% 11.4% 6.3% 4.3% Average 10.2% 11.8% 10.9% 10.5% 15.5% 10.4% 6.2% Table 3: Y-o-Y Absolute Gross Loan Company Year Ended Sept-14 AFG March 34.48 35.67 36.96 37.38 38.00 38.69 38.79 AMMB March 86.56 87.48 87.82 85.66 86.64 86.87 87.89 CIMB Dec 249.68 264.78 270.35 279.80 297.90 297.99 289.64 Maybank Dec 386.96 409.47 418.01 432.66 464.58 459.65 441.89 PBK June 237.47 245.04 253.05 258.81 268.05 273.45 277.19 RHB Cap Dec 135.99 142.46 143.54 144.67 151.48 151.48 149.64 Average 1,131.1 1,184.9 1,209.7 1,239.0 1,306.6 1,308.1 1,285.0 Net Interest Margin (NIM) cap the decline. Overall, banks under our coverage posted better NIM on the average of 2.26% vs. 2.19% in 4Q15 and 2.21% in 3Q15. Of note, banks have started to raise their base rate in average of 3.79% from 3.77% in 1Q16, resulting in higher assets yield. Banks tweaked their base rate higher in response to higher cost of funds that compressed their margin 2
in past four quarters. Additionally, the stiff price-based competition for retail fixed deposits have receded that drove industry LDR to be stable at 88%. We expect NIM to stabilize at this stage given stable LDR that will drive NIM downwards. Nevertheless, several banks have guided smaller margin NIM compression in FY16 given tighter LCR requirement, though we believe that is not the case given the majority of the assets are backed with quality collaterals. Table 3: Net Interest Margin (NIM) AFG 2.25% 1.85% 2.16% 2.19% 2.15% 2.15% AMMB 2.38% 2.33% 2.12% 1.71% 1.72% 2.02% CIMB 2.79% 2.65% 2.61% 2.68% 2.66% 2.62% Maybank 2.20% 2.26% 2.28% 2.38% 2.29% 2.34% Public Bank 2.20% 2.15% 2.11% 2.16% 2.16% 2.20% RHB Capital 2.26% 2.22% 2.13% 2.13% 2.13% 2.22% Average 2.35% 2.24% 2.24% 2.21% 2.19% 2.26% Net interest income stabilized. Given improving NIM, NII was elevated in 1Q16 as higher asset yield helped cool the cost of funds. Besides, we note that ALR has recovered from as low as 4.49% (in September-15) to 4.61% in March-16. Based on our channel checks, we understand that banks may soon nudge up their respective lending rates either via higher base rates or higher spread. Higher lending rates, coupled with more discipline deposit competition will result in the stabilization of NIM compression Table 4: Net Interest Income AFG 214 186 208 213 216 211 AMMB 487 471 424 432 395 388 CIMB 2,242 2,191 2,269 2,416 2,461 2,384 Maybank 2,442 2,605 2,680 2,897 2,932 2,903 Public Bank 1,555 1,534 1,560 1,629 1,654 1,685 RHB Capital 806 800 784 844 871 883 Total 7,746 7,787 7,925 8,431 8,529 8,454 Table 5: Percentage of Net Interest Income to Total Income Dec-14 Mar-15 Jun-15 Sept-15 Dec-15 Mar-15 AFG 61% 61% 60% 58% 60% 60% AMMB 48% 42% 44% 46% 44% 43% CIMB 61% 60% 59% 63% 61% 64% Maybank 48% 52% 55% 54% 52% 54% Public Bank 69% 68% 67% 66% 66% 67% RHB Capital 48% 53% 53% 56% 52% 55% Average 56% 56% 56% 57% 56% 57% 3
Non-interest income under pressure. NOII remained quiet in 1Q16, indicating muted NOII for the rest 2016. Capital market, including fund raising in private and public sector were seen slow down due to the sluggish reception to new deals given the slowdown in economy despite the stabilizing in bond yield. IPO deals too remained a challenge given sluggish reception, where we only witnessed 6 companies made their debut in Bursa Malaysia vs. 13 companies in 2015 involving deals of RM1.38 billion. Forex income, however, has been a bright spark for banks thus far. This is because the volatile exchange rates should be positive for both forex volumes and spreads. Table 4: Non Interest Income Dec-14 Mar-15 Jun-15 Sept-15 Dec-15 Mar-15 AFG 78 62 78 92 82 80 AMMB 317 416 333 299 295 323 CIMB 1,052 1,122 1,165 1,035 1,167 904 Maybank 1,831 1,450 1,241 1,371 1,728 1,511 Public Bank 502 370 389 392 403 381 RHB Capital 671 506 488 448 573 477 Total 4,451 3,926 3,694 3,637 4,248 3,676 Table 5: Percentage of Non-Interest Income to Total Income Dec-14 Mar-15 Jun-15 Sept-15 Dec-15 Mar-15 AFG 22.3% 20.3% 22.7% 25.1% 22.7% 22.7% AMMB 31.4% 37.4% 34.5% 32.1% 32.9% 35.8% CIMB 28.6% 30.5% 30.4% 27.0% 28.9% 24.3% Maybank 36.1% 29.1% 25.4% 25.6% 30.8% 28.0% Public Bank 22.2% 16.3% 16.8% 15.9% 16.1% 15.2% RHB Capital 40.0% 33.5% 32.8% 29.6% 34.1% 29.7% Average 30.1% 27.8% 27.1% 25.9% 27.6% 26.0% Deposits growth softened significantly. Liquidity position has been weakening in the banking system in 1Q16, continuing the trend since 2Q15. On average, deposits only grew 3.2% y-o-y vs. 6.2% y-o-y in 4Q15. This was the result of the moderation in deposits from financial institutions and business enterprises. Factors that could have contributed to the weaker deposit growth from these groups include, among others, capital outflows and weaker underlying economic activities, Nevertheless, CASA position remained stable at 29.2% vs. 29.5% in 4Q15 with notable decliner hampered by AFG which deliberately reduced its deposits to manage funding cost. We notice that banks ended their cut-throat deposits competitions since 4Q15 which was the key reason that drove NIM to go south. Going forward, we believe FY16 could see deposit growths settles at this rate as banks are targeting LDR to hover around 90%-95% due to weakness in deposits growth, the level we have not seen since 2008. 4
Table 6: Total Deposit AFG 40.8 41.5 44.6 44.1 43.5 46.0 AMMB 85.3 90.0 92.1 89.3 90.9 90.4 CIMB 263.5 282.1 296.6 310.8 317.7 317.1 Maybank 420.2 439.6 447.1 477.5 478.2 466.4 Public Bank 268.4 276.5 285.4 296.3 301.2 306.6 RHB Capital 148.1 157.1 158.7 159.0 158.2 157.5 Total 1286.8 1324.5 1334.4 1376.9 1389.5 1384.0 Table 7: Deposit Growth Y-o-Y AFG 13.0% 13.7% 10.8% 8.1% 5.0% 3.2% AMMB 2.8% 2.4% 3.3% 4.6% 1.0% -1.9% CIMB 10.7% 13.2% 9.7% 17.9% 12.6% 6.9% Maybank 11.1% 13.0% 11.5% 13.6% 8.8% 4.3% Public Bank 11.0% 10.2% 11.6% 10.4% 8.9% 7.4% RHB Capital 14.1% 10.8% 5.1% 7.3% 0.6% -0.8% Average 10.5% 10.5% 8.7% 10.3% 6.2% 3.2% Table 8: CASA Position AFG 34.8% 33.6% 34.5% 33.6% 35.0% 32.1% AMMB 20.5% 20.3% 20.9% 21.1% 20.4% 20.7% CIMB 35.1% 34.4% 35.4% 34.1% 34.1% 35.4% Maybank 35.2% 35.4% 35.0% 35.5% 33.7% 33.3% Public Bank 25.0% 25.0% 24.1% 30.8% 29.8% 29.7% RHB Capital 21.7% 22.3% 23.4% 23.3% 24.0% 24.1% Average 28.7% 28.5% 28.9% 29.7% 29.5% 29.2% Table 9: Loans to Deposit Ratio AFG 85.1% 82.0% 85.1% 86.3% 88.9% 84.3% AMMB 95.3% 93.5% 95.3% 97.0% 95.6% 97.3% CIMB 91.5% 88.7% 94.9% 95.8% 93.8% 91.3% Maybank 91.8% 92.2% 95.4% 97.3% 96.1% 94.7% Public Bank 88.0% 88.0% 87.6% 90.5% 90.8% 90.4% RHB Capital 89.5% 89.3% 92.1% 95.3% 95.8% 95.0% Average 90.2% 89.0% 91.7% 93.7% 93.5% 92.2% 5
Cost remains under pressure. Banks under our coverage posted improving CIR with slower growth in absolute operating expenses of 0.4% y-o-y vs. 13% y-o-y in 1Q15. The recent cost rationalization drive had pushed CIR to 49.1% after the last 4 quarters that have seen CIR at elevated levels (above 50%). We reckon the improving CIR was genuine given banks inability to grow income level given the sluggish NOII. Although several banks have executed MSS in 2015, we don t expect this to be atrend in FY16 unless there is a severe downturn in the economy. Table 11: Overhead Expenses AFG 156 165 167 166 175 181 AMMB 496 544 484 500 573 619 CIMB 2239 2340 2440 2261 2211 2137 Maybank 2573 2489 2419 2601 2776 2602 Public Bank 635 703 722 741 749 788 RHB Capital 987 820 843 1169 962 777 Total 7086 7061 7075 7438 7446 7104 Table 12: Cost to Income Ratio AFG 44.7% 51.8% 48.6% 45.4% 48.4% 51.2% AMMB 49.8% 50.7% 50.6% 53.4% 63.5% 57.4% CIMB 63.2% 58.1% 55.4% 53.4% 53.9% 57.4% Maybank 50.7% 49.9% 49.5% 49.0% 48.2% 48.4% Public Bank 28.1% 31.0% 31.2% 30.0% 30.5% 31.5% RHB Capital 58.9% 54.3% 56.7% 56.8% 57.2% 48.5% Average 49.2% 49.3% 48.7% 48.0% 50.3% 49.1% Asset quality continued to be healthy. On average, GIL for banks under coverage dropped 9bps in 1Q16 to 1.78%. The higher GIL was derailed by AFG (-20bps), AMMB (-14bps) and Maybank (-25bps). Positively, CIMB s GIL was unchanged at 3.0% on the back of higher provision that continued to be elevated. Overall, credit charge improved due to better recoveries in 1Q16, however we expect the challenging economic condition may weigh down credit charge coupled with minimum 1.2% requirement on collective allowance. However, we still expect overall credit environment to remain fairly benign unless economic growth slows much more than anticipated and the unemployment rate picks up sharply. 6
Table 13: Gross Impaired Ratio AFG 1.14% 1.03% 1.01% 1.1% 1.10% 1.30% AMMB 1.88% 1.79% 1.80% 2.0% 1.80% 1.94% CIMB 3.09% 3.18% 3.31% 3.4% 3.0% 3.0% Maybank 1.52% 1.50% 1.56% 1.5% 1.86% 2.11% Public Bank 0.61% 0.56% 0.54% 0.5% 0.5% 0.5% RHB Capital 2.03% 2.03% 2.05% 1.9% 1.9% 1.8% Average 1.71% 1.68% 1.71% 1.74% 1.69% 1.78% Conclusion and Recommendations 2016 may see banks reporting flat earnings due to the slowdown in macro-economic conditions that will set to influence banks performance. Among banking sector challenges include 1) flat loans growth 2) tight liquidity 3) margin compression 4) rising credit cost and 5) challenging macroeconomic conditions which may continue to weigh on the banking industry. Banking sector is NEUTRAL in 2016 with 2 banks emerge as our Top Pick namely Public Bank (TP: RM21.38) and BIMB Holdings (TP: RM4.28). Price (RM) Table 6: Peers Comparison EPS (RM) P/E (x) P/B (X) ROE (%) Div Yield (%) Company YE FY16 FY17 FY16 FY17 FY16 FY17 AFG Mac 4.19 0.3 0.4 11.7 11.2 1.3 1.3 10.8 2.0 4.00 Hold AMMB Mac 4.57 0.4 0.4 10.3 10.2 0.9 0.9 10.7 4.5 4.80 Hold BIMB Dec 4.04 0.4 0.4 10.3 9.8 1.7 1.5 17.2 3.3 4.28 Hold CIMB Dec 4.56 0.5 0.5 10.4 9.2 1.0 0.9 7.3 2.9 4.75 Hold Maybank Dec 8.39 0.7 0.7 12.9 12.3 1.4 1.3 11.9 6.4 9.10 Hold RHB Cap Dec 6.10 0.6 0.6 9.8 9.2 0.8 0.8 7.2 1.0 6.20 Hold Public TP (RM) Dec 19.14 1.3 1.4 14.8 14.0 2.3 2.0 17.1 3.0 21.38 Buy Bank Affin Dec 2.23 0.2 0.3 9.8 9.0 0.6 0.5 4.5 1.3 NR NR MBSB Dec 1.18 0.1 0.1 11.0 11.2 0.8 0.8 5.4 7.5 NR NR STMB Dec 3.99 0.2 0.2 20.1 17.8 5.0 NA 24.5 1.8 NR NR HL Bank Jun 13.20 1.0 1.1 13.3 12.5 1.3 1.3 11.1 3.0 NR NR Average 0.6 0.7 12.8 11.4 1.5 1.1 11.1 3.9 Source: BNM, M&A Securities Call 7
M&A Securities STOCK RECOMMENDATIONS BUY Share price is expected to be +10% over the next 12 months. TRADING BUY Share price is expected to be +10% within 3-months due to positive newsflow. HOLD Share price is expected to be between -10% and +10% over the next 12 months. SELL Share price is expected to be -10% over the next 12 months. SECTOR RECOMMENDATIONS OVERWEIGHT The sector is expected to outperform the FBM KLCI over the next 12 months. NEUTRAL The sector is expected to perform in line with the FBM KLCI over the next 12 months. UNDERWEIGHT The sector is expected to underperform the FBM KLCI over the next 12 months. DISCLOSURES AND DISCLAIMER This report has been prepared by M&A SECURITIES SDN BHD. Readers should be fully aware that this report is for informational purposes only and no representation or warranty, expressed or implied is made as to the accuracy, completeness or reliability of the information or opinion contained herein. The recommendation and opinion are based on information obtained or derived from sources believed to be reliable. This report contains financial forecast/projection based on our assumptions which may defer from the actual financial results announced by the companies under coverage. All opinions, estimates and assumptions are subject to change without notice. Analysts will initiate, update and cease coverage solely at the discretion of M&A SECURITIES SDN BHD. Investors are to be cautioned that value of any securities invested may fluctuate from time to time. We advise investors to seek financial, legal and other advice for investing based on the recommendation of our report as we have not taken into account each investors specific investment objectives, risk tolerance and financial position. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. M&A SECURITIES SDN BHD can accept no liability for any consequential loss or damage whether direct or indirect. Investment should be made at investors own risks. M&A SECURITIES SDN BHD and INSAS GROUP of companies, their respective directors, officers, employees and connected parties may have interest in any of the securities mentioned and may benefit from the information herein. M&A SECURITIES SDN BHD and INSAS GROUP of companies and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. This report may not be reproduced, distributed or published in any form or for any purpose. M & A Securities SdnBhd (15017-H) (A wholly-owned subsidiary of INSAS BERHAD) A Participating Organisation of Bursa Malaysia Securities Berhad Principal Office: Level 1,2,3 No.45 & 47,43-6 The Boulevard, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur Tel: +603 2282 1820 Fax: +603 2283 1893 Website: www.mnaonline.com.my 8