Malaysia Banks: 1Q09 Results: Loan Losses Tame, but NPL Formation Rises

Loan loss provisions surprisingly low, but NPL formation jumps - NPL formation for domestic banks more than doubled to RM3.8bil from RM1.5bil in the previous quarter. While credit costs rose to 93bps from 81bps in the previous quarter, it is still below our sector forecast of 137bps, thus explaining 1Q09's better-than-expected performances across most banks.

§ 1Q09 sector ROA 0.9% (4Q08: 1.0%) - Excluding acquisitions, gross loans grew 2% QoQ. Net income declined 5% QoQ on 18% increase in loan loss provisions. Pre-provision income stayed flat as recovery in treasury activities (+8%) was offset by higher overheads. Meanwhile, NIMs contracted 5bps QoQ due to the 100bps OPR cut during the quarter.

§ Quant view: Attractive - The Malaysian banking sector resides in the 'Attractive' quadrant. AMMB and Hong Leong lie in our 'Attractive' quadrant. Bumiputra Commerce lies in the 'Glamour' quadrant with poor valuation but strong momentum, while the rest of the banks - RHB Cap, Public Bank, Maybank and Alliance Financial - lie in the 'Contrarian' quadrant.

§ Outlook - [1] While loan growth has slowed significantly in 1Q09, there are nascent signs of improvement in consumer growth in 2Q09. [2] We expect loan loss provisions to rise in the coming quarters given the higher NPL formation in 1Q09. [3] NIM is expected to recover from 1Q09 levels as term deposits gradually reprice downwards.

§ No change to our ratings - We maintain our cautious view on banks. Sell Public: current P/B of 2.9x well above its historical average P/B of 2.4x, downside risk to loan growth with weak economic backdrop. Sell Maybank: worse-than-expected Indonesia performance, upcoming impairment charges and likely disappointing dividend payout this year. Sell BCHB: Strongest YTD performance of +50% bringing stock to mid-cycle valuations, better-than-expected results appear to be in the price.

§ Top pick AMMB - Asset quality has surprised the market on the upside. It is one of few banks which saw lower NPL formation in 1Q09. We believe management is rightly focused on profitability over chasing market share in the current economic downturn. Valuations still look undemanding -- just 1.1x P/B - in spite of its +32% YTD share price performance.