Investment Highlights

• We maintain OVERWEIGHT on the banking sector. Our top picks continue to be Maybank (FV: RM10.70/share), RHB Bank (FV: RM6.30/share) and BIMB Holdings (FV: RM5.10/share).
• External factors and recent concerns of Malaysia dropping out of the global bond index have pushed valuations of large-cap banking stocks to new lows which are below those during the 2007 and 2008 financial crisis. We see values emerging for the larger capitalized banking stocks of Maybank, CIMB and Public Bank. While concerns remain on the external front such as the unresolved trade tensions, the recent revivals of the ECRL and Bandar Malaysia projects are testament to the improved Malaysia-China ties and we believe that this could bring down the market risk premium as well as improve investors’ sentiment. On the wider market concerns of Malaysia dropping out of the global bond index, we believe that there is still room for further consolidation on the bond market as well as improvement in market accessibility and macro fundamentals before the next review by the FTSE Russell in September 2019. From our comparison of the domestic banking stocks vs. regionals peers seen in Exhibit 2, the valuations of local banks appear to be inexpensive. The domestic banking sector is trading at an average P/BV at 1.2x for FY19 and 1.1x for FY20. These valuations are close to the average P/BV ratios of Thailand and Singapore’s banking sector. Meanwhile, the valuations of banks in Indonesia seem pricier than that in Malaysia, Thailand and Singapore.
• ROEs for the local banking sector at 10.6% are near the average of Singapore and Thai banks. ROEs of the domestic banking sector are not seen as significantly inferior to those of Singapore and Thailand. Even though ROEs of banks in Indonesia are higher comparatively, valuations are also pricey as evidenced by the higher average PE and PB ratios for the Indonesian banking sector in FY19 and FY20.

• Dividend yields of local banks are turning attractive compared with the regional peers aside from valuations. Dividends yields for banks in Malaysia on average are higher than that of Singapore, Indonesia and Thai banks at 4.5% and 4.8% for FY19 and FY20 respectively. With the recent share price weakness, we are seeing dividend yields of banks, particularly CIMB and Maybank, as more attractive relative to its peers in the region. The attractive dividend yields should lend support to the share prices of these stocks.

• Minimal impact on banks’ earnings should there be a 25bps cut in the OPR in 2H19. Market expectations are steering more towards a possibility of a 25bps cut in the OPR in 2H19. Our sensitivity analysis (Exhibit 3) shows that a 25bps reduction in the benchmark rate will have minimal impact on banks’ earnings of 1–3% while NIMs could be impacted by 2–4bps. The impact of any OPR change will be short term (estimated 1 to 2 quarters) as repricing of deposits will eventually catch up with the changes in lending rates. In any case, valuations of all banks will soon be rolled over to FY20 after the completion of the upcoming results review in May 2019. Hence, even if interest rates are cut by 25bps, it will not negatively impact our valuations for banks. We would be more concerned on consecutive rate cuts of more than 50bps in 6 months which is a highly unlikely scenario.

Source: AmInvest Research - 25 Apr 2019