Banking sector
Maintain neutral: The most significant revision to our sector outlook post-fourth quarter of 2016 (4Q16) results is the lowering of our credit cost assumptions, and the raising of our projected cumulative core net profit growth forecast for 2017 to 10.5% from 4.2% previously.

This on its own would justify the recent run-up in share prices, but with 2017 return on equity (ROE) still projected to trend around 10%, valuations are fair for now, with the stocks trading at an average 2017 price-to-book value of 1.2 times. Still “neutral” on the sector, “buy” Alliance Financial Group Bhd, Hong Leong Bank Bhd and BIMB Holdings Bhd.

Apart from RHB Bank Bhd, the 4Q16 results of the other banks were in line with our expectations. What surprised most was the hefty six-basis-point quarter-on-quarter (q-o-q) expansion in net interest margin (NIM) that the banks eked out in the final quarter.

Negating this was the still elevated credit costs at Malayan Banking Bhd, CIMB Group Holdings Bhd (CIMB) and RHB.

As such, while 2016’s operating profit expanded 4% year-on-year (y-o-y), net profit slipped -1% y-o-y, this being the third consecutive year of flat earnings growth for the banks.

We have raised our 2017 operating profit growth forecast marginally to 5.9% from 5.1%, largely on the back of more stable NIMs. The key variance, however, is that we are now projecting a faster growth in net profit of 10.5% y-o-y versus 4.2% y-o-y previously, with double-digit core net profit growth for CIMB and RHB, predominantly on lower credit costs.

The risk to earnings, in our view, is still to the downside if credit costs prove to be stickier than expected. Despite the faster projected earnings growth in 2017, sustaining ROEs will still be a challenge, unless operating profit growth picks up pace.

We project average ROEs to slip to 10.3% in 2017 from 10.4% in 2016. We project an ROE recovery in 2017 for CIMB and RHB, on the back of faster earnings growth. Even so, we expect their ROEs to come in sub-10%, along with that of two other banks.

The 2016 results season ended with no major surprises, as all banks reported results that were within our expectations save for RHB, which saw some earnings disappointment on the back of a spike in credit costs.

Stripping out one-offs, 4Q16 cumulative core operating profit rose 5% y-o-y (+3% q-o-q), largely on the back of improved NIMs in 4Q16 and ongoing cost efficiencies. Credit costs, however, remained elevated and loan loss provisions jumped 38% y-o-y (+33% q-o-q). This overshadowed the top-line growth and as a result, pre-tax profit slipped a marginal 1% y-o-y (-5% q-o-q).

Nevertheless, aided by a lower effective tax rate of 21% in 4Q16 versus 25% in 4Q15, net profit expanded 4% y-o-y in 4Q16 (-3% q-o-q). The banks ended the year 2016 with an operating profit growth of 4% y-o-y, but with net profit slipping a marginal 1% y-o-y.

2016 essentially marks the third year in which net profit growth has been flat for the banks (+0.3% y-o-y growth in 2015, -1.0% y-o-y in 2014). — Maybank IB Research, March 6