Banking - OVERWEIGHT - 26 June 2012

Our picks for the sector remain unchanged for 2H2012 centering on two key themes, i.e. ETP-optimism for the banking sector and 2) the emergence of value for dark horses in the sector. Under these themes, we like CIMB Group (“CIMB”) (OP, TP: RM8.50) and Malayan Banking (“MAYBANK”) (OP, TP: RM10.40), both of which have also expressed optimism for the prospect of their corporate loans growth in their last 1Q12 result announcements. We  also like BIMB Holding (“BIMB”) (OP, TP: RM3.60) and AFFIN Holding (“AFFIN”) (OP, TP: RM4.30) as the potential dark horses in the banking sector as they may benefit from potential corporate actions. In summary, we believe that local banking groups will do well in the current conducive banking system with their strong balance sheets despite the volatility in their earnings.  Thus, we are maintaining our OVERWEIGHT rating on the Banking sector.

Seeing ETP-led optimism in blue-chip banks. The Government’s US$350.0b (RM1.0t) ETP (Economic Transformation Program) is the source of our optimism on loans growth for Malaysian banks. YTD, the government has already awarded over RM15.0b of new projects under the ETP i.e. RM13.0b for MRT-related projects and RM2.0b for the LRT extension. Hence, the banking system is likely to see acceleration in their credit growth in 2H2012.  CIMB and MAYBANK have individually also expressed optimism for the prospect of their corporate loans growth in their 1Q12 result announcement. In their respective analyst briefing sessions, both banks shared the same positive view of a likely higher corporate loans demand in 2H2012.

CIMB’s management has continued its bullish tone for the 1Q12 results with the guidance of a +16% loans growth in 2012, driven by local credit demands. In addition, CIMB is also in the process of leveraging on its IB strength to get a higher share of the business in both loan and IB deals in the region i.e. in Singapore and Indonesia, which should further add to its revenue growth this year in our view. MAYBANK meanwhile has seen a moderate balance sheet expansion in 1Q12. We believe that MAYBANK is also one of the key beneficiaries of the ETP projects roll-out with its corporate loans  growth likely to see an impressive 2H. Management continues to see stronger loans demand from GLC-related companies on ETPrelated projects along with the Oil & Gas sector as well as from Sarawak’s SCORE projects.  As such, we do not discount the possibility of the group delivering or even outperforming its FY12 loans growth target of 16.2%.

Dark horse picks have been outperforming. We believe that BIMB is still the top candidate here as it has all the strength over its operating, i.e. a decent and liquid balance sheet (reasonable RWCR and low L/D ratio) although it ROA and ROE are still generally subpar (in part due to its low leverage level). In addition, a successful re-rating of Syarikat Takaful Berhad (“STM”) will also benefit BIMB’s valuation. The current share price of RM3.01 works out to an undemanding entry price of just 1.36x BV into its 51%-owned Bank Islam. As such, we believe that BIMB remains deeply undervalued and we do not discount the possibility of some corporate actions by management to unlock its value. BIMB continues to be our dark horse pick in the banking sector. Our valuation model suggests that smaller banks are currently trading well below the overall  banking stocks’ price multiples range.

These low valuations are likely to play catch-up due to the reasons mentioned above. Hence, we strongly believe that BIMB could be the best dark horse among the banking stocks. 

As for AFFIN, it was said that BEA could potentially to explore various options to retain capital, including the sale of its non-core assets according to a few reports. We believe any sales could include its 23.5% investment stake in AFFIN.  A potential sale will be good news for AFFIN’s share price. This is because it could spur speculative interest in the stock due to potential M&A talks. However, even with or without  the M&As angle, we still believe AFFIN offers a favourable risk and reward proposition. AFFIN’s potentially higher credit risks have already been priced in by the existing discount in  its valuation. With a reasonable 9% ROE and its undemanding valuations (FY13E: 8.1x PER, 0.7x P/BV), there is room for its earnings to improve as well. Its current valuation at FY13 P/BV multiple of 0.7x with an estimated ROE of 9.1% is overly pessimistic, we reckon.

Source: Kenanga