Banking Sector - Listless, despite a good 3Q results season OVERWEIGHT

- All seven banks above expectations. All the seven banks that we track closely came in within expectations in the latest September 2012 quarter earnings season. The banks that came in well above were Maybank, RHB Cap and AFG. The third quarter is thus far the best results season so far over the last one year.  

- NIM unchanged, which is positive in our view. Gross loans growth on a bottom-up approach for the banks under our coverage was slower though at 1.4% QoQ in 3Q12, against 5.0% QoQ in 2Q12. This was mainly due to the lack of large corporate and bridging loans which had earlier in 2Q12 boosted growth for RHB Cap, Maybank and CIMB. The sector’s net interest margin (NIM) was unchanged on a QoQ basis in 3Q12, which is positive in our view. This is considering widespread expectations that NIM would continue to fall due to price competition.  

- Non-interest income resumed growth at 3.0% QoQ in 3Q12 compared to a decline of 3.6% QoQ. Recall the 2Q12 decline was due to the absence of gains from the securities portfolio which was particularly good in 1Q12, offset by strong investment banking fees. For 3Q12, non-interest income was sustained by CIMB’s healthy increase in third-party flows from its treasury and markets division, as well as good investment and trading income for HLBB.

- Total gross impaired loans have improved with a further decline of 3.9% in 3Q12 (2Q12: -5.5% QoQ), due to lower new impaired loans overall. This was despite an uptick of 1.7% QoQ for the banking industry as a whole, as indicated by the latest September 2012 banking statistics. Gross impaired loans ratio for the average of the banks that we track has improved to 2.3% in 3Q12, from 2.4% in 2Q12. The sector’s loan loss coverage strengthened to 96.0% in 3Q12 from 94.5% in 2Q12.

- Our annualised sector net earnings growth is unchanged at 6.5% for 2012 and 10.8% 2013. Despite the good earnings results season in 3Q, the share prices of  banks have remained largely listless. We believe this is due to ongoing concerns about sustainability of non-interest income, in view of the general election uncertainty ahead. 

- Maintain overweight. Our top pick is RHB Cap, given its cheap valuation, with the final piece of its Indonesian acquisition falling in place soon. CIMB’s share price has been lacklustre but we are unmoved. CIMB has demonstrated its ability to boost regional reach with strong growth from its Indonesian bond market income and treasury activities. It also offers the most comprehensive banking infrastructure. At 1.8x P/B, CIMB looks undervalued relative to its peak of 2.3x P/B.   

Source: AmeSecurities