Investment Highlights

• Revising our ESG scoring methodology for banking sector from a basic to more comprehensive model. Scoring for the new model will be based on 18 parameters (Environment: 7, Social: 5, and Governance: 6) compared to 6 under our existing model. Our current ESG scoring model is based on a simple average of 1-5 stars assigned on 6 parameters: i) board composition, ii) employee welfare and environmental protection, iii) corporate social responsibility, iv) earnings quality, v) balance sheet strength, and vi) accessibility and transparency . Moving forward, we intend to be more inclusive in our ESG scoring for banks. Hence, we have expanded our model to include more parameters. This enables quantitative data from disclosures by banks in presentation slides, annual reports, and sustainability reports to be taken into consideration for ESG scores in addition to assessing qualitative measures.

• Introducing weights for each measure under environment, social and governance pillars to prioritise the importance of the parameters. Our methodology to assess environmental score places a higher weightage of 30% on: i) bank’s exposure to sustainable financing out of total loans, and ii) mix of financing to high risk ESG sectors . Meanwhile, on social score, we have assigned higher weights on banks: i) corporate social responsibility investments or spend (35%), ii) average training hours per employee (25%), and iii) investments in training (20%) . On scoring for governance, higher weights of 20% have been assigned for measures on: i) diversity of board’s age, ii) tenure of board member, iii) number of independent directors, and iv) cybersecurity and data privacy . A weighted score will be determined separately for environmental, social and governance pillars.

• Weighted scores for environment, social and governance pillars summed up for an overall ESG rating for banks. Scoring for the environmental pillar will have the most significant impact on the overall ESG score with a weightage of 40%. This is be followed by governance (35%) and social assessment (25%) scores. We will adjust fundamental valuations of banks by -6%/-3%/ 0%/+3%/+6% based on the overall ESG rating of 1/2/3/4/5 stars .

• ESG score for CIMB Group upgraded from 3 to 4 stars under the new revamped scoring methodology. ESG scores for Maybank and Hong Leong Bank remained at 4 stars, equivalent to the previous scoring model. Our fundamental valuation for CIMB has been raised from RM6.90/share to RM7.10/share with a 3% premium accorded based on the overall ESG score of 4 stars under the new model. Meanwhile, the ESG scores for Public Bank, RHB, Alliance Bank and Bank Islam are retained at 3 stars.

• Top picks for ESG - Maybank, CIMB and Hong Leong Bank. Among the larger capitalised banks, Maybank and CIMB are rated highest for ESG with an overall score of 4 stars, contributed by at least 4 stars accorded for each of the pillars, environment, social and governance. Maybank and CIMB have been highly rated for their exposure to sustainable financing out of total loans with substantial cumulative mobilisation of RM52.9bil and RM70bil respectively. Comparatively, Maybank has set a high sustainability financing target of RM80bil to be achieved by 2025 while CIMB’s target is RM100bil by 2024. Meanwhile, Hong Leong Bank is another of our top pick for ESG with an overall appraised score of 4 stars. This is supported by a rating of 5 points for the lowest exposure of financing to high ESG risk sectors.

• We maintain NEUTRAL on the sector in view that rerating catalysts remain limited in the near term. Sector valuation is inexpensive at FY24F P/BV of 0.9x. However, there remain limited earnings catalysts in the near term, and we project a core earnings growth of 3.9% YoY in 2024 vs. 4.6% YoY in 2023. We continue to see macro headwinds, ongoing geopolitical tensions, pressure on funding cost and uncertainties in yield curve which are likely to impact treasury and investment income.

Source: AmInvest Research - 26 Feb 2024