Maintain overweight: The continuation of sterling results for Malaysian banks reflects the favourable operating environment, enabling them to achieve our projected core net profit growth of 26.2% for 2010, driven by healthy top line growth and a drop in credit costs.
Earnings in 2QFY2010 were buoyed by a 13.5% year-on-year (y-o-y) rise in net interest income and 52.3% y-o-y plunge in loan loss provisioning. These more than offset a 1.6% y-o-y dip in non-interest income and a 9.6% y-o-y increase in overheads.
The combined net profit for Malaysian banks in the quarter was ahead of our forecast by just 1.3% but trumped consensus by 5.7%. All the banks met our and market expectations, and AMMB Holdings Bhd did better than expected. We have upgraded our earnings numbers for AMMB and Malayan Banking Bhd (Maybank), leading to FY2011-12 net earnings upgrades of 3% to 5% for the sector.
The swift core net earnings growth of 33% to 51% in the past four quarters reflects the improving operating environment of accelerating loan growth, increased activity in the capital markets and stable asset quality. All this substantiates our positive take on bank earnings for 2010 and 2011.
Thanks to robust loan approvals in the past five to six months on the back of strong economic recovery in 1HFY2010, the industry’s loan growth strengthened further from 9.8% y-o-y in March 2010 to 12.5% y-o-y in June 2010. This was driven by the acceleration of both key loan segments from 4.3% y-o-y to 7.2% y-o-y for business loans, and from 11.7% y-o-y to 12.9% y-o-y for consumer loans.
We are projecting brisk core net earnings growth of 26.2% for 2010, riding on strong economic recovery given the projected GDP growth of 7%. Given the improved economic climate, we expect stronger loan growth of 11% to 12% (against 7.8% in 2009) and a stable gross NPL ratio of 3.7%to 3.8% (against 3.7% in December 2009) for 2010.
AMMB remains our top pick as we believe that its transformation programme should help it raise its return on equity (ROE) from 11.6% in FY2010 to 16% in FY2012. For the longer term, management is gunning for an even higher target of 18%, which will be one of the best among local banks.
Our other picks for the sector are Maybank on the bullish outlook for its overseas operations, Public Bank Bhd for the best fundamentals among the Malaysian banks and Affin Holdings Bhd’s expected robust loan growth and the decline in credit costs. — CIMB Research, Sept 6
This article appeared in The Edge Financial Daily, September 7 2010.
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