Tuesday, 5 March 2013

Banking Sector - 4Q12 wraps up a year of strong recoveries OVERWEIGHT

- Most banks above expectations. Of the seven banks that we track closely, five came in above expectations in the December 2012 earnings season. Earnings growth however came in slower at -3.2% QoQ in 4Q12, but this was due to absence of one-off items, including one-off gain from sale of NPL for CIMB (which was about RM133mil from CIMB Thai in 3Q12).

- Loans growth was better. Gross loans growth on a bottom-up approach for the banks under our coverage was better at 3.6% QoQ in 4Q12. This compares to 1.4% QoQ rise in 3Q12. Net interest income was flat though at -0.5% QoQ in 4Q12, led by higher interest expense overall against softer gross interest income growth.

- Non-interest income was much stronger at 4.2% QoQ in 4Q12 (3Q12: 3.0% QoQ), despite expectations that generally the 4Q would be a slow quarter. The better growth was due mainly to RHB Cap, which recorded a large increase of 65.1% QoQ in non-interest income in 4QFY12. This was due to incorporation of around two months of OSKIB’s operations. But more importantly, the bulk of the increase for RHB Cap came from the fee income portion, while investment and trading income was relatively unchanged. This means that RHB Cap’s non-interest income boost will likely be from the more sustainable fee income portion.

- Sector credit cost is still relatively low at only 16bps, albeit already at a higher level than 3Q12's unusually low level of 8bps . There were ongoing strong recoveries at AFG and HLBB. However, Maybank and RHB Cap reported upticks in loan loss provision, attributed to a couple of manufacturing accounts, which are likely isolated in nature.

- Our annualised sector net earnings growth is 9.9% for 2013. With the final reported 2012 year-end results, we have upgraded our 2012 net earnings by 2.4%, to take into account the generally lower-than-expected loan loss provision trend in 2012. The net earnings growth for 2012 is now revised upwards to 10.6%, from 6.5%, given actual reported figures. We have kept on 2013 forecasts broadly unchanged. Our sector net earnings growth for 2013 is still at 9.9%.

- Maintain overweight. Given generally benign environment locally, we expect impaired loans to remain stable. Going forward, most banks expect credit costs to normalise at 20bps to 30bps. This is in line with our sector credit cost assumption of 33bps (revised from 36bps previously). Thus, the key driver to sector earnings will likely be from the noninterest income segment. Our view is we expect non-interest income to be sustained, despite general election concerns. Our sector rating is still OVERWEIGHT, with BUYs now being AFG, CIMB and RHB Cap.

Source: AmeSecurities

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