Banking - 2Q2012 results review and outlook

Following the 2Q12 reporting season, our picks for the sector remain unchanged with the focus on two key themes i.e. 1) ETP-optimism in banking, and 2) dark horses in the sector.  Under the first theme, we continue to like CIMB Group (“CIMB”) (OP, TP: RM8.50) and Malayan Banking Berhad (“MAYBANK”) (OP, TP: RM10.40), both of which are optimistic over the prospect of their wholesale banking growth as expressed in their 2Q12 result announcement comments.  Their results have also led to the consensus upgrading their ratings, price targets and earnings on both companies. Meanwhile, we continue to like BIMB Holding Bhd (“BIMB”) (OP, TP: RM3.60) and AFFIN Holding Bhd (“AFFIN”) (OP, TP: RM4.30) as the potential dark horses in the sector as they will benefit from their respectively current corporate actions. The wide valuation gap of these smallest banks (AFFIN and BIMB) against the rest of the sector could see catch-up plays on their stocks as the sector rally continues. We are maintaining an overall OVERWEIGHT rating on the Banking sector.

The outperfomers. The strategy of growing their wholesale and investment banking businesses by the top two GLC-banks, MAYBANK and CIMB, have shown positive results in the 2Q2012 reporting season.  In line with our “ETP-optimism in banking” theme first opined by us in May2012, MAYBANK and CIMB have announced more than  satisfying sets of results, driven by higher corporate loan growth and growing fee income contribution.

MAYBANK’s low leverage and accelerating corporate loan growth support our bull case for the banking group, with L/D ratio of 86.9%, Core Tier-1 ratio of 9.2% and an accelerating loan growth of 15% by end-June 2012.  The Government’s fiscal progress has been the key to the group’s balance sheet growth.  We are seeing accelerated disbursements under the ETP, with the overall MAYBANK’s June banking loans growing 5.4% QoQ, driven by the 8.7% QoQ growth in corporate lending. The group reported a 2Q12 profit of RM1,437.5m, upped 6.7% QoQ and 24.5% YoY and it was also 5% above the consensus. Its results saw the consensus upgrade the bank’s rating, price target and earnings and in our view, should lead to share price outperformance in 2H2012. We expect corporate lending, non-interest income contribution and credit cost to be the key factors driving the higher estimates.  We rate MAYBANK as an OUTPERFORM with a TP of RM10.40. 

CIMB’s management has also continued its bullish tone for the 2Q12 results with the guidance of a +16% loan growth in 2012, do be driven by both local and overseas credit demands and reflecting a more benign outlook for credit quality alongside improved loan pricing. In addition, CIMB is also in the process of leveraging on its IB strength to  get a higher share of the business (under its regime of CIMB 2.0), both in 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.  

Its reported 2Q12 profit of RM1,109.0m, upped 9.7%  QoQ and 24.5% YoY, was driven by the significant improvement of its Wholesale banking business. The Wholesale banking’s PBT rose 19.5% QOQ, driven by the jump in the Market division as debt capital market and foreign exchange flows were strong and synergies from the “CIMB 2.0” reorganisation started to show results.  We continue to rate CIMB as an OUTPERFORM with a TP of RM9.40.

Our “Dark Horses”  have been strong outperformers in 2Q12.  With AFFIN’s share price up by +17% and BIMB +40% since April, both stocks have been the best performers in the financial sector.  We believe that their ongoing possible corporate actions could continue to be a rerating catalyst for their share prices.  

AFFIN announced that BNM has granted it approval to start negotiation with DRB Hicom to acquire an equity stake in Bank Muamalat. This could lead to a rerating of AFFIN. We think its current valuation at a 20% discount to its Book Value is still undemanding.  We rate AFFIN as an OUTPERFORM with a TP of RM4.30.

We also believe BIMB continues to be the dark horse as well as it has all the characteristics, e.g. a decent and liquid balance sheet (reasonable RWCR and low L/D ratio) although the bank is generally sub-par in terms of its ROA and ROE (in part due to its low leverage level). Still, our valuation model suggests that it is currently trading well below the overall banking stocks’ price multiple range. Hence, its low valuation is likely  to play a catch-up.  We rate BIMB as an OUTPERFORM with a TP of RM3.60.

Source: Kenanga