Investment Highlights

• KLFIN Index has fallen by 2% over the last 3 trading days following concerns that the US economy could be heading into a recession with the recent weaker economic data. This has resulted in market now pricing in expectations of more rate cuts in US in 2H2024. Based on US Fed funds futures and overnight index swaps (OIS), market is now pricing in 100bps cuts in the Fed fund rate towards the remainder of 2024, as compared to 1-2 cuts earlier (25bps each in Sept and Dec 2024).

• 10-year MGS yield slipped 18bps to 3.69%, mirroring the slide of 56bps in 10-year US treasury yield to 3.84% from end of June 2024.

• Imminent interest rate cuts in Singapore and Indonesia tracking potential reductions in US Fed Fund rate. For Southeast Asian countries, US rate cuts are likely to have a more immediate impact on NIMs of Singaporean banks and domestic banks with Singapore operations. Meanwhile, in Indonesia, a 25bp cut in the benchmark rate is likely in 4Q24, lowering it to 6% on potential downside risk from global factors. This comes after the move by the Indonesian Central Bank to raise BI rate by 25bps to 6.25% in April 2024 to defend the Indonesian rupiah. Post-pandemic, the BI rate has been raised by 275bps cumulatively since Aug 2022, higher than the 125bps cumulative increase in OPR domestically.

• OPR to be sustained at 3% in 2H24. Domestically, BNM will continue to be data dependent in its monetary policy decisions. With inflation rate within the target of 2%-3.5% and our economic team expecting 2024 GDP growth to trend closer to 5%, we expect the OPR to remain unchanged at 3% this year. Malaysia has yet to fully normalise the OPR back to 3.25% in the pre-pandemic years.

• Share prices of banking stocks staged a recovery yesterday in tandem with the rise of US stock futures after the recent 3-day global stock market rout.

• Focus on laggard banks (Public Bank and Hong Leong) with less vulnerability to potential rate cuts in overseas operations with continued macro headwinds and US election uncertainties. We see opportunities to look into more defensive names, Public Bank (BUY, FV: RM5.00/share), trading at 1.3x FY25F P/BV and Hong Leong Bank (BUY, FV: RM24.10/share), trading at 1x FY25F P/BV with a more resilient asset quality, high loan loss coverage than industry and less vulnerability to potential interest rate cuts for operations in foreign markets. For Public Bank, overseas operation accounts for 6% of the group’s PBT with Cambodia as the main contributor. Meanwhile, for Hong Leong Bank, international markets contribute to 33% of the group’s PBT (30.8% derived from Chengdu, China). We see exposures to China market operations to be less susceptible to impacts of rate cuts as the 1-year prime lending rate in the country had already been gradually lowered to 3.35% from 4.2% since late-2019. In contrast, US has hiked its Fed Funds rate steeply by 525bps to 5.50% from 0.25% in early 2022 .

• On attractive dividend yield and compelling valuation picks, we like Alliance Bank (BUY, FV: RM4.30/share). Alliance Bank is seen as trading at a compelling valuation of 0.9x FY25F P/BV with a dividend yield of 5.9%. Valuation at below 1x P/BV is seen as attractive based on projected FY25F ROE of 10.5%. Meanwhile, Alliance Bank’s loan growth is projected at 10% for FY25F and expected to outpace the industry average of 5%-6%. The group has the highest NIM among peers at 2.5%.

• Staying cautious on Maybank (HOLD, FV: RM10.80/share) in the near term on potential rate cuts in Singapore, a significant foreign market which contributes to more than 20% of the group’s PBT. Based on a projected FY25F ROE of 10.8%, we see Maybank as fair valued with a FY25F P/BV of 1.2x.

• CIMB (BUY, FV: 8.00/share), is the best performer from a share price movement of +24.4% year-to-date (YTD) highest among the stocks under our coverage, outperforming the KLFIN Index. The stock now trades at FY25F P/BV of 1x, an improved valuation from a low of 0.8x in FY20, reflecting more upbeat sentiments on improved earnings, ROE and asset quality. As the share price has performed well, this presents opportunities to lock in gains. We see any retracements in valuation to below 1x P/BV as an opportunity to add exposure. Operations in Singapore contribute to 11% of group PBT, lower than Maybank comparatively. Indonesia is a significant foreign market for CIMB, accounting for more than 20% of its PBT. Dividend yield for the stock is decent at 5.6% for FY25F.

• Maintain NEUTRAL on the banking sector and remain selective on stocks. Improving NIM remains a challenge for banks on the back of a still-elevated cost of funds with limited room for deposit campaign rates to be further reduced in 2H24 while lending rates have been competitive. 3 digital banks, which commenced operations, have offered higher rates on savings deposits (GXBank: 3% p.a, Aeon Bank: 3.88% p.a and Boost Bank: up to 3.6% p.a). This should keep deposit rates elevated even though pricing is now more rational compared to early-2023 and late-2022. Asset quality of banks is anticipated to be stable. Nevertheless, credit cost in the near term will be flattish with provisions unlikely to trend lower to improve earnings. Earnings growth remains moderate at 5.4% for the sector in 202

Source: AmInvest Research - 7 Aug 2024