Malaysia Banks: 2Q09 results wrap: Upgrades across the board

2Q09 results stronger than 1Q09 due to capital market rebound whilst NPLs remain benign. Of the 5 banks under our coverage that reported 2Q09 results, four reported stronger than expected results whilst only Maybank’s numbers were impacted by the impairment of BII and MCB. The stronger quarterly results were mainly due to the Q/Q improvement in top line as a result of
1) stronger non-interest income levels driven by better than expected brokerage and wealth management income levels as well as "held-for trading" securities gains as capital market conditions improved despite net interest margin compression (due to recent OPR increases); and
2) absence of significantly larger loan loss provisions as NPLs remain benign.

· Improved outlook for next 18 months. With improved confidence and visibility that the domestic economy is likely to recover by 4Q09 coupled with recent measures by the PM Najib Razak administration to bolster capital markets, both JPM and consensus are expecting for bank earnings to be stronger in the coming months driven mainly by top line growth as NIMs recover from temporary compression of recent OPR rate decreases whilst loan growth holds steady at the 6-8% level and the fee-income business picks up momentum as a result of improved economic activity and better capital market conditions. Also, as fears of a prolonged recession abate, risks of significantly higher NPL levels are fast dissipating which reduces the risk of rising provision levels. Note that bank management is understandably cautiously optimistic vs street expectations over the earnings outlook at this stage given the recent u-turn of events compared with the previous quarter. The disconnect at this stage remains the risk that the economy fails to rebound in 4Q09 which puts top line expectations at risk while the possibility of higher NPLs re-emerge due to the slowdown.

· Our preference at this stage is for banks with strong wholesale banking franchises as the improvements in the flow business has yet to be fully captured, i.e. CIMB and AMMB are our top two picks. Although the consumer banking business will benefit from improved loan growth and lower loan loss provisions, the impact of the recovery on the bottomline is likely to only be felt at the earliest in 1H10, thus Neutral on Public and HL Bank. We are Underweight on Maybank as we believe its transformation program will take another 18 months to translate into meaningful profitability levels that justify current valuations.