Banking - Dancing with the “cheap money

Our picks for the sector remain unchanged for 4Q12 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 Holdings (“CIMB”) (OP, TP: RM8.20) and Malayan Banking (“MAYBANK”) (OP, TP: RM10.40), both of which  are optimistic over the prospect of their wholesale banking growth prospects 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 (“BIMB”) (OP, TP: RM3.60) and AFFIN Holding (“AFFIN”) (OP, TP: RM4.30) as the potential dark horses in the sector as they will benefit from their respective current corporate actions. The wide valuation gaps of these two 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.

Our new theme is “dancing with the cheap money”.  The re-emergence of quantitative easing is expected to attract strong liquidity inflows into emerging countries over the next 12 months, especially into Asean capital market as investors chase stronger currencies and higher-yielding  assets to gain outperformance. We believe Asean-based investment banks should be the prime beneficiaries given that the US mortgages-backed securities buyback exercise tends to encourage higher carry-trade activities and drive up valuations and market capitalisations. We like Maybank under this theme as its Kim Eng regional-based stockbroking network should see stronger equity broking incomes over the next couple of months and contribute higher fee-based incomes to  Maybank. This is a positive change and provides strong fundamental reasons to further own the stock. Hence, we are picking Maybank as our top pick in 4Q despite it being already an outperformer in 3Q12.  We  rate  MAYBANK  as  an  OUTPERFORM  with a TP of RM10.40. 

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 mentioned by us in May2012, MAYBANK and CIMB have since 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 its 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, up by 6.7% QoQ and 24.5% YoY and was also 5% above the consensus. Its results saw the consensus upgrading the bank’s rating, price target and earnings and in our view, should lead to a share price outperformance in 2H2012. We expect corporate lending, non-interest income contribution and credit cost to be the key factors driving the higher earnings estimates.  

CIMB’s management has also continued its bullish tone in its 2Q12 results with the guidance of a +16% loan growth in 2012, to 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, which rose 9.7% QoQ and 24.5% YoY, was driven by the significant improvement in 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 by +40% since April, both stocks have been the best performers in the financial sector.  We believe that their on-going possible corporate actions could continue to be a rerating catalyst for their share prices. AFFIN announced that BNM has granted its approval to start negotiation with DRB-Hicom to acquire an equity stake in Bank Muamalat. This could lead to a further rerating of AFFIN. 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).  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 see it playing a catch-up. We also continue to rate BIMB as an OUTPERFORM with a TP of RM3.60.

Source: Kenanga