Banking - Reaffirming our stand on ETP-optimism theme

DanaInfra Nasional has recently come to a financing agreement with several banks on the RM8.0b government guaranteed-sukuk financing programme to finance the first phase of the MRT project. The MRT project, which is part of the government’s USD350.0b Economic Transformation Programme (ETP), is expected to increase loan growth and capital market activities of the banking system tremendously. Currently, AmInvestment Bank, CIMB Investment Bank, Maybank Investment Bank and RHB Investment Bank are the joint lead arrangers for the financing programme. With the MRT project financing agreement ongoing, we expect the banking system to continue supporting the rest of the ETP projects financially. Therefore, we are reiterating our stand that the banking system will see an uptrend in either loan growth or capital market pipelines for 2H2012. We maintain our OVERWEIGHT rating on the banking sector.

RM8.0b agreement inked. Recently, DanaInfra Nasional, the government-backed special funding vehicle estimated that around RM30.0b worth of funds will have to be sourced to finance the Sungai Buloh-Kajang line, the first phase of the MRT project. The estimated financing required by DanaInfra to partly finance the first phase of the MRT project up to 30 June 2013 is RM8.0b. The good news is that it has recently inked a financing agreement with several banks on this RM8.0b government guaranteed-sukuk financing programme. The RM8.0b financing is only the first tranche to partly finance the whole project above and thus we are expecting more of such financings to come in the future.

We expect the remaining RM22.0b financing requirement for the MRT project to further increase the loan growth and capital market pipelines of the banking sector and those banks, which are the joint lead arrangers for the financing programme. The strong demand for financing the MRT project above is in line with our ETP-optimism theme where we see an acceleration in credit growth for the banking system in 2H2012. With RM8.0b loan financing already been agreed and more financing demand for further ETP projects to come, we continue to be bullish on both CIMB Group Holdings (“CIMB”) and Malayan Banking (“MAYBANK”) to achieve, or even to outperform, their respective FY12 loan growth targets of 16%.

BNM statistics. Based on Bank Negara Malaysia May 12 statistics report, there are strong indicators that the banking system will be able to support the lending and capital market activities with local funding. The loan-to-deposit ratio in the month was at slightly higher level of 78%, with unutilised deposits of RM293.7b. This excess liquidity will be able to support ETP-related infrastructure projects like the MRT project. With the first phase of the MRT project costing only around RM30.0b, we are very optimistic that the banking system would be able to fully finance the overall MRT project without putting any stress to the local banking system liquidity.

Playing catch-up soon? All in all, although the global economy is facing uncertainties due to the crisis in Europe, the Malaysian market is still looking strong with the FBMKLCI Index achieving an all-time high in the past few days. Malaysian banks are also looking fundamentally solid with steady revenues, benign asset qualities, excessive provisions and good capital managements coupled with high capital ratios and healthy dividend payouts. In addition to the optimism from ETP, we believe that local banks will also outperform in 2H2012 with their higher earnings and strong balance sheets. As such, we believe our top Big Cap Banking Stock Picks – CIMB and MAYBANK – are under-appreciated especially when both of them have underperformed the KL Finance Index and the FBMKLCI by 12%, 4% respectively. As such, we believe these banking stocks are likely to play catch up soon.

We are maintaining our OVERWEIGHT call on the sector. We have OUTPERFORM calls on MAYBANK (TP: RM10.40), PBBANK (TP: RM15.60), RHBCAP (TP: RM9.60), CIMB (TP: RM8.50), AMMB (TP: RM6.70), AFFIN (TP: RM4.30) and BIMB (TP: RM3.60). AFG (TP: RM3.70) and HLBANK (TP: RM10.90) are rated as MARKET PERFORM.

Source: Kenanga