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Mixed outlook for banking sector

Maybank and AFG among top stock picks

PETALING JAYA: While Malaysian banks saw commendable financial results in the second quarter of this year, research analysts have mixed views on the banking sector's outlook for the coming months.

CIMB Research maintained its “overweight” rating on the banking sector, saying in a recent report that there were potential re-rating catalysts of financing opportunities for Economic Transformation Programme (ETP) projects, stronger-than-expected loan growth, better growth prospects for banks' overseas operations as well as mergers and acquisitions (M&As) news flow.

An “overweight” rating means the sector has a high number of stocks that are expected to have total returns of 15% or better over the next 12 months.

CIMB Research said it was projecting a 14.9% net earnings growth for the banks under its coverage this year which should arise from a 12% increase in net interest income, a 19.7% jump in non-interest income, and a 1.5% drop in loan loss provisioning.

Description: http://biz.thestar.com.my/archives/2011/9/7/business/b_6maybank.jpg

Maybank is said to have an undemanding valuation

“All these factors are expected to more than offset the 13.9% rise in overheads. We envisage a favourable operating environment this year with a healthy projected loan growth of 11%-12% and a 30-50 basis point drop in the gross impaired loan ratio.”

“Generally, the operating environment remains favourable with loan growth of 13.5% year-on-year in June and improving asset quality,” said CIMB Research, which covers >Affin Holdings Bhd, Alliance Financial Group Bhd (AFG), AMMB Holdings Bhd, Hong Leong Bank Bhd (HLB), Malayan Banking Bhd (Maybank),Public Bank Bhd and RHB Capital Bhd.

It was noted that the banking sector saw net earnings growth that bounced back from 12.5% year-on-year in the first quarter of this year to 18.4% year-on-year in the second quarter, partly driven by write-backs of credit costs and robust investment income, which were not sustainable.

However, the results for the second quarter were slightly below CIMB Research's expectations as RHB Capital and HLB missed forecasts by 6% to 9%, primarily due to lower-than-expected net interest margin (NIM) and one-off merger costs for the latter.

CIMB Research said Public Bank was still unrivalled with a return on equity (ROE) of 26.3% in the second quarter, which was above the sector average of 16.4%.

“Public Bank's superior ROE came from its robust asset growth, which was partly supported by deposit growth and non-equity financing, as well as best operational efficiency, benign credit costs, and active capital management to maintain a lean capital structure.”

Meanwhile, HwangDBS Vickers Research retained its 15% loan growth target for this year, with growth in the second half driven by consumer and business, and potential upside from capitalisation of ETP projects.

HwangDBS Vickers said banks were expected to continue to build traction in sustainable fee income, especially in transaction banking.

“Net interest income will be supported by loan growth as NIMs will continue to be under pressure.”

HwangDBS Vickers noted that non-interest income was the key earnings driver (29% increase quarter-on-quarter) for the banking sector in the second quarter, led by transaction banking, treasury and capital market activities, and asset portfolio investment gains.

However, net interest income was flat in the second quarter despite strong loan growth (5% increase quarter-on-quarter).

Meanwhile, ECM Libra Investment research head Bernard Ching maintained a “neutral” call on the banking sector.

“Valuations are not compelling and we expect loan growth to taper off in the coming months,” said Ching in a recent note.

Ching pointed out that year-to-date annualised loan growth decelerated to 13.6% in July from 14.6% in June, dampened by increased global uncertainties and gradual monetary tightening by Bank Negara.

“Average lending rate spread continued to narrow, reaffirming our cautious stance on the NIM outlook.”

In July, property loans remained as the key growth driver, accounting for 40.6% of the year-to-date credit expansion, followed by working capital loans at 23.6%.

Ching said the growth momentum of property loans was expected to taper off with the May OPR (overnight policy rate) hike starting to take effect and a more stringent credit policy by banks.

Both Ching and CIMB Research said their top stock pick was Maybank.

Ching said Maybank had an undemanding valuation, limited earnings exposure from its Indonesian operations, and served as a good proxy to the indirect thematic play for the upcoming ETP projects.

CIMB Research said Maybank stood to gain the most from the implementation of the initiatives under the ETP given its well-diversified business portfolio. “Maybank also boasts the sector's highest dividend yield of about 7%,” added CIMB Research.

Meanwhile, HwangDBS Vickers said AFG was its top stock pick.

“AFG is currently the cheapest Malaysian banking stock, and its scalable domestic franchise and non-interest income traction will ensure sustainable earnings and ROE. Given attractive valuation and strong earnings visibility going forward, AFG will stand out in the next round of bank consolidation.”

Ching also said AFG was preferred for its exposure to the M&As and restructuring themes in the banking sector.

 

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