AmInvestment Research has Buy calls on CIMB and RHB Bank

KUALA LUMPUR: AmInvestment Bank Research has Buy calls on CIMB and RHB Bank with fair value of RM5.70 and RM6 a share which are based on price-to-book value of one time.

“We continue to like these two stocks due to compelling valuations, decent returns on equity (ROEs) and potentially further improvements to cost-to-income ratios from cost initiatives,” it said on Tuesday.

The research house said 4Q16 sector core earnings (excluding Maybank's one-off gain of RM625mil from the sale of shares in Visa and MasterCard) declined 2.1% on-quarter, due to higher provisions despite registering a better operating income.

“On a full calendarised basis, core earnings for the sector for 12M16 contracted by 1.7% on-year,” it said. 

The FY16 saw a mixed bag for banks' earnings. Cumulative net profits of four banks – Maybank, Public Bank, Hong Leong Bank and AFG – were within expectations while AMMB’s earnings met consensus expectation. 

RHB Bank and CIMB's cumulative earnings were slightly below our expectation. 

For RHB Bank, it was due to lower-than-expected non-interest income (NOII) brought about by the volatility in the capital and financial markets. 

On CIMB, there was a variance to our expected earnings after stripping out a one-off gain of RM150mil from the sale of 51.0% equity in Sun Life.

“Loan growth accelerated in 4Q16 compared to 3Q16, due to stronger momentum for corporate loans of Maybank and CIMB. Generally, domestic retail loans continued to be slow, as evidenced in Public Bank, Hong Leong Bank and AFG. 

“Overall sector's net interest margins (NIM) expanded by 7bps on-quarter to 2.25% in 4Q16, underpinned by management of liquidity and lower funding cost. Nevertheless, pressure on NIM is still expected ahead due to keen deposit competition.

AmInvestment Research said that sector operating expenses (Opex) contracted by 0.7% on-quarter. Against a core operating income growth of 1.7% on-quarter, JAW remained positive for the sector with a normalised CI ratio of 47.3%.

Upticks in gross impaired loan (GIL) ratio for most banks while credit cost rose in 4Q16 but stayed within expectations.

Except for AMMB which continued to have a write-back in provisions for impairments of its retail loans, 4Q16 saw banks with lower GIL ratios reported upticks in the ratios from rise in impairment of domestic retail loans (Hong Leong, Public Bank and AFG).

Meanwhile, the larger banks’ (Maybank, CIMB and RHB) GIL ratios were elevated, largely due to impairments of corporate loans.

“Calendarised sector core earnings growth for 2017 trimmed to 6.4% from 6.8%. This is after adjusting our estimates for operating income and credit cost assumptions,” it said.

JAWS ratio, according to Wikipedia is a measure used in finance to demonstrate the extent to which a trading entity's income growth rate exceeds its expenses growth rate, measured as a percentage.

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