Banking sector
Maintain neutral: The banking sector reported a core net profit (CNP) of RM6.16 billion for the first quarter of 2019 (1Q19) or -2.9% year-on-year (y-o-y) and -8.9% quarter-on-quarter (q-o-q), broadly in line with our expectations. RHB Bank was the outperformer, seeing 1Q19 CNP up 6.7% y-o-y and 11.5% q-o-q, due to lower impaired loan allowances. Maybank, AMMB, Alliance Bank and Hong Leong Bank reported less favourable q-o-q results.

 
The banking industry saw an average net interest margin (NIM) compression of seven basis points (bps) y-o-y, and down 11 bps q-o-q, due to a weaker NIM at Maybank, AMMB and RHB. In our view, a weak operating income growth as at 1Q19 — -2.1% y-o-y; -1.5% q-o-q — is a telling sign of moderating times ahead. As we’re expecting a flat CNP growth in 2019, we maintained our “neutral” rating on the sector.

The Malaysian banking sector’s net profit for 1Q19 was at RM6.17 billion (-4.7% y-o-y; -8.4% q-o-q), while normalised net profit declined 2.9% y-o-y and 8.9% q-o-q. The sector’s CNP of RM6.16 billion is within our expectations — 23% of our 2019 banking universe’s net earnings projection of RM25.7 billion. Overall, our earnings revisions for expected earnings for 2019 to 2021 have been minimal. Nonetheless, we foresee higher downside risks on earnings for Maybank and AMMB, on concerns over higher credit costs.

The key sector earnings driver for 1Q19 was the banks’ strong fund-based income — +1.7% y-o-y; -1.9% q-o-q — accounting for 75% of operating income (-2.1% y-o-y; -1.5% q-o-q). This was despite some NIM pressure of seven bps y-o-y, while q-o-q was mixed. Meanwhile, non-interest income excluding one-off disposal gains continued to disappoint y-o-y and q-o-q due to a weak investment income. As the sector’s operating expenses have been flat y-o-y and q-o-q, we have not seen many changes in 1Q19’s average cost-to-income ratio at 49%.

We reaffirmed our “neutral” rating on the sector, trading at a 2019 estimate price-to-book value (P/BV) multiple of 1.24 times versus the past 10-year average of 1.53 times and the past five-year average of 1.35 times. Our top picks are Alliance Bank (ABMB MK: RM3.84; buy; target price [TP]: RM4.80 at 1.12 times earnings for calendar year 2020 [CY20E] P/BV target) — in a niche and high margin banking segment; and Aeon Credit Service (ACS MK: RM16.42; buy; TP: RM20.40 at 13 times CY20E price-earnings target) — driven by a robust receivables growth. Upside and downside risks are funding cost easing or pressure, and a stronger or weaker loan growth. — Affin Hwang Capital, June 10