Banking - NEUTRAL - 28 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). MAYBANK (OP, TP: RM10.40) and PBBANK (OP, TP: RM15.50) also remain on our OUTPERFORM ratings as the two offer reasonable dividend yields. We have however lowered our rating for AMMB (MP, TP: RM6.70) to a Market Perform from an Outperform due to its limited upside from its current share price. Meanwhile, we are maintaining our MARKET PERFORM ratings on HLBBANK (MP, TP:RM10.90) and AFG (MP, TP:RM3.70) on valuations ground.

The 4Q11 result trend and outlook saw the banking sector posting a flat QoQ earnings (1.0%) with underlying profit growth momentum clearly having stalled. Going forward, there are limited opportunities to drive the sector earnings growth materially beyond our current expectation of a high single digit growth, given the on-going margin headwind and limited credit charged surprise.  The 4Q11 reporting period was also somewhat uninspiring for the market. Apart from the decline in capital market revenues, in our view, the flat quarterly profit growth through 2011 was actually due to the lack of policy rate rises. Non-interest incomes continue to experienced a material decline (-7.3% YoY). We also expect softer trading condition to persist in the short term due to the ongoing global economic uncertainties. 

Margins emerging signs of softness without any further interest rate hike (-11bps YoY, on average). We believe the margins will continue to face a modest headwind in 2012.  Credit demand was strong however (11-15% on average vis-à-vis nominal GDP growth of 5.0%) despite the weak external outlook. Going forward, we are forecasting just a low teens credit growth to be driven by the start of the ETPrelated projects.  Provisioning on new impaired assets has been reduced but the credit charge is already low. Capital in the sector remains strong (Industry T-1 Cap Ratio of 12.0% and RWCR of 15.9%) – which is well positioned for Basel 3. This include PBBANK (CCR: 10.7% RWCR: 15.9%) that was previously deemed as being under-capitalised.  Going forward, the capital ratio is expected to remain healthy in supporting lending growth.

Earnings growth is limited.  Given our view that responsible finance will promote a healthy household lending growth, momentum of the loan growth will hence be lower for a period. As such, our base case for the system loan growth is broadly in the low  teens only.  Together with the on-going margin headwinds and limited provisioning surprise, there are limited opportunities to drive the sector’s earnings growth materially beyond our current expectations of high single digit.  

Current valuations.  Current valuations of the sector have gone up and the upside from here seems tight after rising 18% as measured by the KL Financial Index from the 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 thus unlikely. Hence, we are increasingly looking to other factors to drive our rating recommendations such as M&As opportunities instead of organic growth.

The major bank valuations are ‘at the middle of the ranger’ of their historical mean valuations, which has typically represented their ‘fair values’ and this will also somewhat cap their absolute performance apart from the current uncertain external economic outlook.  

To ride on 2Q2012 news flows. For stocks, although our Target Price for RHBCAP has been reduced (due to relative weak earnings), its discount valuation remains supported by better growth prospects for the year ahead from its potential merger with OSK. Following the reporting season and the strong rebound of a few anchor banks from their October 2011’s low i.e. MAYBANK (+5%), PBBANK (+8%), AMMB (+2%), our pecking order has now changed to 1) RHBCAP and 2) CIMB with potential M&A news flows to rerate these stocks’ valuations. Meanwhile, thus far, the foreign shareholding of CIMB is still at its 18-month low despite the increasing foreign net buying on Bursa Malaysia.

Source: Kenanga