Banks : Concerns over negative earnings outlook for banks
2015 outlook for the banking sector
Maintain neutral: We cut our banking universe earnings forecasts by 2%/8%/7.8% for calendar year (CY) 2014/15/16 from the topline to bottomline, following the recent third quarter of 2014 (3QCY14) results announcements. This is in anticipation of the cascading effects of macro risks on the domestic economy and banks’ earnings, especially from fourth quarter 2014 (4QCY14) to 2QCY15. These include: i) defaults in high-risk sectors, i.e. commodity and oil & gas related industries; ii) a prolonged budget deficit, causing a major scale-back in government fiscal spending; iii) fluctuations in bond yields and impact on banks’ treasury books (non-interest income); and iv) weakening of the ringgit on foreign borrowings.
The above risks will become contagious in the economy and the banking sector will bear most of the brunt. We remain cautious on the asset quality of banks with a higher exposure to corporate and government-driven projects like CIMB, RHBCapital and Maybank, should there be inevitable delays in payments.
Under our revised outlook, we like banks which are highly defensive in market shares, have sound asset quality and sufficient liquidity, are adequately capitalised and have solid track records. Our top picks are: Public Bank (PBB, “buy”, price target (PT) RM20 at 2.59 times price to book value [P/BV]) and defensive banks like Hong Leong Bank (HLB) and Alliance Financial Group (AFG) are rated “add”. Meanwhile, we downgrade Maybank (“reduce”, PT RM8 at 1.37 times P/BV) due to a weaker earnings outlook. CIMB and RHB also have “reduce” calls.
Although we are concerned about a negative earnings outlook, we maintain our “neutral” stance on the Malaysian banking sector, as we believe that the earnings for PBB, HLB and AFG will remain relatively resilient and downside risks are capped by high quality assets. Currently, we forecast core net earnings in 2014 Estimate (E) to decline by 1.6%, followed by a flat 2015E before rebounding by 9.8% in 2016E. — Affin Hwang Capital, Dec 9
2015 outlook for the banking sector
Maintain neutral: We cut our banking universe earnings forecasts by 2%/8%/7.8% for calendar year (CY) 2014/15/16 from the topline to bottomline, following the recent third quarter of 2014 (3QCY14) results announcements. This is in anticipation of the cascading effects of macro risks on the domestic economy and banks’ earnings, especially from fourth quarter 2014 (4QCY14) to 2QCY15. These include: i) defaults in high-risk sectors, i.e. commodity and oil & gas related industries; ii) a prolonged budget deficit, causing a major scale-back in government fiscal spending; iii) fluctuations in bond yields and impact on banks’ treasury books (non-interest income); and iv) weakening of the ringgit on foreign borrowings.
The above risks will become contagious in the economy and the banking sector will bear most of the brunt. We remain cautious on the asset quality of banks with a higher exposure to corporate and government-driven projects like CIMB, RHBCapital and Maybank, should there be inevitable delays in payments.
Under our revised outlook, we like banks which are highly defensive in market shares, have sound asset quality and sufficient liquidity, are adequately capitalised and have solid track records. Our top picks are: Public Bank (PBB, “buy”, price target (PT) RM20 at 2.59 times price to book value [P/BV]) and defensive banks like Hong Leong Bank (HLB) and Alliance Financial Group (AFG) are rated “add”. Meanwhile, we downgrade Maybank (“reduce”, PT RM8 at 1.37 times P/BV) due to a weaker earnings outlook. CIMB and RHB also have “reduce” calls.
Although we are concerned about a negative earnings outlook, we maintain our “neutral” stance on the Malaysian banking sector, as we believe that the earnings for PBB, HLB and AFG will remain relatively resilient and downside risks are capped by high quality assets. Currently, we forecast core net earnings in 2014 Estimate (E) to decline by 1.6%, followed by a flat 2015E before rebounding by 9.8% in 2016E. — Affin Hwang Capital, Dec 9
