Banking - NEUTRAL - 12 March 2012

The banking sector has moved back towards its fair value over last three months and in our view, can no longer simply be argued as ‘being cheap’. Following the recent reporting season, our picks for the sector have changed for 2Q2012. We continue to like banks with M&As newsflows as well as those supported by reasonable valuations. Under this strategy, we like RHBCAP (OP, TP: RM9.60) and CIMB (MP, TP: RM7.90) even if the later is just a Market Performer. MAYBANK (OP, TP: RM10.40) and PBBANK (OP, TP: RM15.50) remain on OUTPERFORM ratings as the two offer reasonable dividend yields. We, however, lower our rating for AMMB (MP, TP: RM6.70) to Market Perform from Outperform due to limited upside from current trading price.  Meanwhile, we maintain our MARKET PERFORM ratings on HLBBANK (MP, TP:RM10.90) and AFG (MP, TP:RM3.70) on valuations ground.

In this note, we look at a summary of  themes from the 4Q2011 reporting season and combine it with the respective company’s stock prices performance since August 2011 and their prospects in 2Q2012. Our findings are as follows.

Themes from 4Q2011 reporting season:

• Flat QoQ earnings (1.0%) – underlying profit growth momentum has stalled. Going forward, there are limited opportunities to drive its earnings growth materially beyond our current expectations of high single digit, with on-going margin headwinds and limited provisioning tailwinds.
• Non-interest incomes – experienced a material decline (-7.3% YoY). We still expect softer trading condition to persist in the short term due to the ongoing global economic uncertainties.
• Margins – emerging signs of softness without a further rate hike (-11bps YoY, on average). We believe the margin will continue to face a modest headwind, in 2012.
• Credit demand – strong outcomes (11-15% on average vis-à-vis nominal GDP growth of 5.0%) despite weak external outlook. Going forward, we are forecasting just a low-teen credit growth to be driven by the start of ETP-related projects
• Provisioning – new impaired assets reducing but credit charge is already low.  
• Capital remains strong (Industry T-1 Cap Ratio of 12.0% and RWCR of 15.9%) – well positioned for Basel 3, remained comfortable. This include PBBANK (CCR: 10.7% RWCR: 15.9%) that was previous deemed as under capitalized. Going forward, capital ratio to remain healthy in supporting lending growth.

Current Valuations. Current valuations have gone up and upside from here seems tight after rising 18%, on KL Financial Index, from October 2011’s  low. With earnings growth in the range of high single-digit to low teens, together with the already tight valuation, we believe valuation multiple expansions are unlikely. Hence, we are increasingly looking to other factors to drive our rating recommendations such as M&As opportunities instead of organic growth.

Pecking order and stock-specific factors to consider for 2Q2012:

RHBCAP:  It  stands  out  from  its  peers  as  it  is  currently  trading  at  1.4x  BV  compared  to  its  long-term average of 1.8x. The current price is still not factoring in its high sustainable ROE of 14% and its growth potential as a real challenger to the current market leaders. The potential exit of Aabar from RHBCAP could act as a rerating catalyst and we expect the valuation to move up soon. 

CIMB: At current valuation, the market has priced in the risk of its earnings slowing down.  However, its 4Q11 result showed some signs of a turnaround in earnings. Together with two potential acquisitions over next couple of months, we do not discount the potential of CIMB share price being rerated in 2Q2012.  

MAYBANK: High dividend payout with an estimated dividend yield of above 5% continues to make it an interesting dividend yield stock.

PBBANK:  It is still our favourite banking stock given its solid track records in earnings growth and high ROE achievement. The confirmation that there should not be any more capital raising exercise for the bank saw its stock being rerated in the last three months. Improving capital adequacy would sustain PBBANK’s strong growth path and also gives it a potential higher capacity for dividend payout. 

AMMB: No major surprises on its earnings outlook. However, its strong capital ratio could potentially see it paying higher than expected dividends despite its subdued outlook. Downgraded due to limited upside from current price level.

HLBANK: The fundamentals for HLBANK are still good although its valuations are not attractive at this juncture. The stock’s recent performance has adequately priced in any potential synergies (on revenue and cost) in our view. We believe the market has already priced in a 18% ROE at the current stock price valuation. 

AFG: Results to be steady with no major surprises. Strong treasury gain continues to drive its fee comes growth.

Source: Kenanga