Lower valuations matched by lower ROE projectionsThe mood conveyed by management teams at recent bank analyst briefings has generally been a somber one, the consensus being that 2016 will continue to be a challenging year. We project 5% 2016 core earnings growth and while valuations have come off across the board, these are matched by lower ROE projections. We remain NEUTRAL on the sector – BUY AFG, HL Bank and HLFG; SELL AMMB.
No growth in 2015Though 2015 was challenging in many ways, banks’ operational performance was decent, with a 7% YoY growth in operating profit on an aggregate basis. NIMs held up better than expected towards year end while NOII growth was robust, aided in large part by forex income/gains. Profitability was nevertheless crimped at the net level due to the jump in credit costs and other allowances, resulting in aggregate core net profit coming in flat YoY. All banks saw core earnings drop YoY except for CIMB (from a low base) and Public Bank.
Some positives and negatives in 2016We expect industry loan growth to moderate further in 2016 to 6.5% from 7.9% in 2015. We still expect asset quality to come under some stress and thus project higher credit costs of 28bps in 2016 vs 22bps in 2015. NIM pressure is likely to persist but on a more upbeat note, we expect NIMs to compress by a lower quantum of about 7bps vs 10bps in 2015. Meanwhile, cost savings from separation schemes in 2015 should filter through this year. What is also positive is that capital positions are more comfortable, now that fund raising exercises are out of the way and since CIMB has improved on its CET1 ratio.
Projecting 5% core earnings growth in 2016For 2016, we project slower operating and net profit growth of 5.5% and 5.3% (+3.4% ex-CIMB) respectively. The downward trend in ROEs is expected to persist and we forecast average ROEs to slip to 10.6% in 2016 from 11.3% in 2015, with sub-10% ROEs for CIMB, RHB and AMMB. We remain NEUTRAL on the sector.
Source: Maybank Research, 08 March 2016