Wednesday 19 December 2012

Banking - 2013 outlook & thematic plays


Given our view that responsible finance will continue to promote a healthier albeit slower household lending portfolio growth, the momentum of the system loan growth will hence likely be lower for 2013. Our base case estimate for the system loan growth for 2013 is in the range of 9-10%, 1-2% lower than 2012. Together with the ongoing margin headwind, there are limited opportunities to drive the earnings growth for banks materially beyond our current expectation of a high single-digit to low teens growth only. In addition, with the already mid-cycle valuation, we believe a valuation multiple expansion is also unlikely. Hence, we are increasingly looking to thematic plays within the banking sector to search for outperformers in 2013.

More moderate but more sustainable. Bank Negara Malaysia (BNM) is adopting a careful approach to its overall lending policy in the system, preferring selective growth rather than a broad-based tightening, which would still promote a healthy lending practice in the system. We expect loans growth in the consumer segment to moderate as the recent Responsible Finance rules relating to downpayments are still affecting demand, such as the 70% LTV rules for third home properties, with is aimed at curbing speculative activities on high-end properties, and also measures such as assessing borrowing capabilities based on net incomes (after tax) to tackle the lower-income group household debts. Nonetheless, the overall 2013 lending growth rate should hit our target of 9%-10%. This is because the current monetary policy and the underlying liquidity condition, with excess liquidity and capacity in the system (a L/D ratio of 79%), should continue to support both investment and consumption demand growth (mostly ETP-related).  

Searching for the next growth driver. As such, the “re-balancing” of the local banking system lending portfolio will continue to occur at a measured pace, although we do think that this will continue to bring changes to the banking industry landscape in the next two years, which has been consumer-driven since 2005. In this  regard, there could be a shift from consumer growth to that of corporate and business growth. This is because of the regulatory intervention on consumer lending requirements in contrast to corporate lending growth, which is not facing any similar direct pressure given the continued growth of ETP-related projects. In the absence of robust growth in the consumer sub-segments, i.e. mortgages, hire-purchase and credit cards, banks have been supporting the financing of ETP-related infrastructure projects – this is reflected most recently in the higher corporate lending growth of 12.1% vs. consumer’s 11.9%.

NIM compression is a norm. A common trend that is unlikely to change in 2013 is the downside risk of NIM asserting itself despite the consistent loan growth in the system. Over the last 12 months, we have seen greater competitions for deposit funding and in the household credit segment. If this proves temporary, we see little downside risk to NIM. However, if this trend is sustained, the lower asset yields could be a major drag on the net interest income and hence EPS growth. In fact, NIM  compression headwind is not new to Malaysian banks.  

Asset quality remains strong. We think that ultimately, impaired assets will be reduced by the strong lending quality and steady loan growth in 2013. Already in 2012, the impairment ratio has fallen 1.54% with a superb 97% loss coverage. There is also a continuing more benign outlook for credit costs with a few big banks guiding for recoveries here.

Valuations seem fair. The major banks’ valuations are currently trading near the average of their historical valuation range, which are considered “fair”. Hence, this will somewhat cap the absolute share price performance of banking stocks apart from the pressure weighed on them by the uncertain external economic outlook. With earnings growth in the range of high single-digit to low teens and together with the already mid-cycle valuation, we believe that valuation multiple expansions are unlikely in the absent of price catalyst. As such, we are increasingly looking to thematic plays within the banking sector in searching for the outperformers for 2013.

Domestically Driven.   We think the resilient credit demand on the bread-and-butter loan segment is still being underappreciated. The demand for this segment has been strong and this has helped insulate the economy from the pressure of lower external demands. 

Public Bank (“PBBANK”) meanwhile has continued to maintain its dominant market share by taking a calculated risk approach and having a quality franchise as well as operating efficiency with a cost-to-income ratio of just 31.8% in 1Q12 vs. the industry’s 46%. Its valuation is high at 3.0x book value but we think this is justified given its 25% ROE, high liquidity position (87% LDR), strong credit quality (117% NPL coverage) and improved CAR to slightly above 8%. That said, its NIMs did fall 10-12bps sequentially on re-pricing given  the competitive pressure on lending rates.  We rate PBBANK as an OUTPERFORM with a higher TP of RM16.80 based on 3.0x its FY13 BV as the market is likely to re-rate it on better capital ratio. BIMB Holdings’ (“BIMB”) management meanwhile is expected to achieve a higher financing growth target of 25% YoY by end-FY12 with a better Financing-to-Deposit ratio of 60%. Its likely higher growth rate than the industry’s 13% financing growth rate will mainly be contributed by ETP-related projects.  We believe its high growth is highly repeatable in FY13 as the group has a a decent and liquid balance sheet (reasonable RWCR and low L/D ratio) although its ROA and ROE is still sub-par (in part due to its low leverage level).  At the same time, we also still expect Bank Islam to deliver a faster balance sheet growth from corporate lending and achieve a better asset quality similar to its peers in 2-3 years time. In addition, we also do not discount the possibility of potential corporate actions by management here ahead to unlock the value of the group.  We are keeping our target price of RM3.60 unchanged based on 1.7x on its FY13 BV of RM2.14.

Bright Spots for Responsible Finance.   More responsible policy measures will reduce systematic risks and thus should benefit banks’ asset quality. We reckon that the domestic banking system should continue to see many years of balance sheet enhancement as argued by us above. 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 a lower credit cost and a surprise in their asset recoveries rate.

Looking at Affin Holdings (“AFFIN”), we note that its potentially higher credit risks  have already been priced in by the existing discount in its valuations.  With its strong result performance, which was driven by impairment write-backs, we believe its current valuation at 0.8x FY13 P/BV with an estimated ROE of 10.3% is undemanding in our view and offers a favourable risk-to-reward proposition. There is room for its trading multiple to improve on its M&A news. Its negotiation with DRB Hicom for a potential acquisition stake in Bank Muamalat (“BMMB”) is still ongoing. This is a good move given that the acquisition of BMMB will be the key to the group becoming a bigger player in Islamic Banking and will widen AFFIN’s branch network with an additional 58 branches from BMMB should the acquisition go through. In addition, AFFIN will also be able to tap into BMMB’s existing business collaboration with DRB-Hicom, in  particularly with Pos Malaysia and Proton.  We maintain our TP at RM4.40 for AFFIN based on a targeted 1.0x its FY13 BV.

The ASEAN Aspiration.   The top two GLC banks  namely Malayan Banking (“MAYBANK”) and CIMB Holdings (“CIMB”) share the aim of gaining domestic leadership as well as also aggressively pursuing their ASEAN market expansions by inorganic growth strategies to have a better geographic coverage and client interaction to derive synergies. Both are now the biggest proxies to ride the ASEAN region resurgence and have started to reap the fruits from their plans and seeing synergies over their respective group integrations. We expect the region’s economic growth to remain resilient over the next 2-3 years.  

CIMB’s management has seen a moderate balance sheet expansion in its 2H12 results, which was mainly due to the weak forex translation of Indonesian Rupiah. Its loan growth was below the guidance of a +16% growth rate for 2012. However, its loan demands continued to be driven by local credit demands, reflecting a more benign outlook for credit quality alongside the improved loan pricing.  In addition, its integration programme “CIMB 2.0” is still ongoing and it is also leveraging on its IB strength to get a higher share of the business, both in loans and IB deals in the APAC, which should further add to its revenue growth year in 2013 in our view.  We continue to rate CIMB as an OUTPERFORM with a TP of RM8.20. MAYBANK is one of the key beneficiaries from the ETP projects rollout with its corporate loans growth likely to see an impressive 1H2013. Management said it continues to see a slightly above industry loan growth that will be driven by stronger loan demand from GLC-related companies on ETP-related 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 a FY13 loan growth target in the range of 11-13%. The group aims to be a leading wholesale bank in ASEAN by 2015.  Areas of opportunities in the region include driving more cross-border deals, growing its Islamic banking business and seeking more treasury products businesses (hedging, currency and swap). This should result in its non-interest income growing over the medium term.  We rate MAYBANK as an OUTPERFORM with a TP of RM10.40

The Huge Laggard.  Meanwhile, RHB Capital’s (“RHBCAP”) share price has been an underperformer in 2012. We attribute this to the fears of a dilution in its earnings per share following the OSKIB and RHBIB merger. RHBCAP’s share price performance has lagged that of its peers substantially and the stock is now trading at the lowest point of its historical PER band as well as its P/BV band.  Its FY13 P/BV is now at a 33% discount to its historical average of 1.8x. We see its performance possibly doing a catch-up in 2013. RHBCAP has clearly demonstrated a track record of delivering quality and consistency in its ROE, and as per management guidance, we are looking for a ROE in the range of 13-14% post its merger. In our view, RHBCAP has the ability to generate synergies from the merger and is likely to immediately eye cross-border deals as a new business growth strategy. We like the company’s undemanding valuation and its cross-border deal growth driver, which will lead to gains in its ROE.  We rate RHBCAP as an OUTPERFORM with a TP of RM8.30.

Source: Kenanga 

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