Smaller banks are trading at a substantial discount to their
peers despite their improving balance sheets. Most banks have been rerated over
2009-2011 as their share prices have climbed 102% with positive consensus EPS
revisions. Nonetheless, with banks are now trading at 1.8x forward with average
16.3% ROE, this makes the bigger banks seem
more expensive as compared with the smaller banks, which are only priced
at 0.9x forward P/BV (a 50% discount) despite an estimated 10.3% ROE. As such, we believe it is time to visit the smaller
banks to find the potential dark horse winners for 2012/13.
Responsible Lending
is a key theme agreed by the consensus in 2012. More responsible policy
response will reduce systematic risks and thus should benefit banks’ asset quality.
As such, we reckon that the domestic banking system should continue to see the multi-year
of balance sheet enhancement.
The banks’ improving
asset quality remains as our central case. The increased trust in banks’
asset quality and their continuous
improvement in the same are likely to support banks’ earnings growth in
the near future with
lower credit cost.
We reckon that
BIMB and AFFIN will be the key
beneficiaries for this theme. In a nutshell, we see small banks being rerated
in 2012/13 as their valuation could rise closer to their bigger peers’ current
valuations and their improving asset qualities could provide the trigger for
this. We will initiate coverage on AFFIN
and BIMB, driven by the following catalysts:
-
Responsible Finance. Bank
Negara Malaysia (BNM) has issued a new set of guidelines to
ensure household debts do not pose a threat to the stability of the financial
system. More policy responses will
reduce systematic risk and benefit bank valuation multiples. The progress of
continuous improving asset quality is now in motion and will be long lasting in
our view, with positive consequences for banks' earnings.
-
The two banks above should benefit from the
sustainable downtrend of non-performing loans that we have witnessed thus far.
Furthermore, due to the perception of weaker asset quality, the tighter
regulations that BNM imposed of late i.e. 70% LTV cap for 3rd mortgages should in a way improve their asset
quality going forward.
-
Hence, for 2012, we are likely to see the two
banks achieving a conservative earnings growth rate of 5%-6% on the back of
9%-10% growth in
loans. We reckon
that our current estimates are
conservative judging from their business
volumes, fees growth and credit qualities. As such, we believe that they are
poised for upward revisions over the next 12-24 months. We believe the two
banks would be able to achieve healthy profit growth, with provisioning
charges continuing to drop towards and
possibly below their normalised levels.
-
Pursuant to improving asset qualities and a
resultant lower credit costs, their FY12/13 Return on Equity (ROE) of 10.3%
would be lower than the bigger banks’ ROE rate of 13%-25% while also trading at
undemanding valuations (of 0.9x P/BV) (see Figure 1).
We believe the two dark horses above share a common
characteristic i.e. they have decent and liquid balance sheets (reasonable RWCR and low L/D ratio) but generally
sub-par in ROAs and ROEs (in part due to their low leverage levels). Thus far, investors have yet to be convinced
by their recent management changes or new strategies, perhaps due in part to
their previously less impressive historic track records in showing improving
growth and profitability. In addition, they also need some critical execution
relating to regional growth and M&As may be needed and central to them
realising their full potentials. Still,
our valuation model suggests that smaller banks are currently trading
well below the overall banking stocks’ price multiple ranges. These valuations are likely to play catch-up due to reasons mentioned above.
Hence, we strongly believe that AFFIN and BIMB could be the dark horses among
the banking stocks.
AFFIN: At just 0.7x
BV, it deserves more.
We believe AFFIN’s potentially higher credit risks are
somewhat priced in by the discount in its valuation, which is already based on
more conservative earnings and credit cost assumptions. With a reasonable 9%
ROE and its undemanding valuations (FY13E:
10.2x PER, 0.7x P/BV), there is room for its earnings to improve. We are
initiating coverage of
AFFIN with an OUTPERFORM rating and a target price of
RM4.30.
A tough operating environment had led to previous consensus
earnings and price target cuts. However, we believe its current valuation at
FY13 P/BV multiple of 0.7x with an estimated ROE of 9.1% is overly
pessimistic.
BIMB: Uniquely
positioned for more growth.
We believe BIMB’s unique footprint translates into a
competitive edge in funding as well as positioning
for growth as BIMB appears ideally
positioned to capture the fastest growth in Malaysia’s Islamic financing
area. (Islamic financing has grown at a
CAGR of 20% since 2005.) It has
a very liquid
balance sheet (50%
L/F ratio, liquid
assets at 40.5%
of assets) and
the highest proportion of CASA deposits (43%) should drive faster NIM
expansion vs. other larger banks as balance sheet gearing and financings grow
faster.
We are initiating coverage with an OUTPERFORM rating and a
TP of RM2.90. Its unique footprint translates into a competitive edge. Its
cheap funding and long term positioning for growth in Islamic areas also make
it an interesting financial stock to invest in with its current undemanding valuations.
OVERWEIGHT. As
a result of
our initiation on
AFFIN and BIMB
with an OUTPERFORM
rating for each and coupled with our recent upgrade in CIMB
rating to OUTPERRFORM
(TP: RM8.50), we are now raising
our sector rating to OVERWEIGHT from NEUTRAL. Following our upgrade of HLBANK
(TP: RM10.90) from UNDERPERFORNM to MARKET PERFORM, we have none outstanding
UNDERPERFORM call in our banking stock coverage.
Source: Kenanga
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