WHATS NEW

Press reports have indicated of a potential resignation of Bank Negara Malaysia’s (BNM) current governor, Tan Sri Muhammad Ibrahim, three years ahead of the expiry of his term in May 21. Press reports had also speculated that former BNM deputy governor Datuk Nor Shamsiah Mohd Yunus could be among the candidates being considered to succeed Tan Sri Muhammad Ibrahim as governor of the central bank if he resigns.

COMMENTS

• Smooth transition. Assuming the press reports are true, the potential appointment of Datuk Nor Shamsiah Mohd Yunus will ensure continuity in BNM’s prudent and pragmatic approach in policy formulation while instilling confidence in the stability of our financial system given the fact that Datuk Nor Shamsiah Mohd Yunus has been in BNM since 1987 and had played a key role in the preparation and the implementation of the Financial Sector Masterplan for the development of the Malaysian financial system from 2001 to 2010. Prior to leaving BNM, she was the deputy governor from 2010 to 2016 and was even considered as one of the potential candidates to replace Tan Sri Zeti Aziz as BNM governor back in 2016 given her level of experience and seniority within BNM. As such, we are not surprised that press reports have listed her as one of the potential candidates to succeed Tan Sri Muhammad Ibrahim’s if he were to resign.
• Maintain MARKET WEIGHT. Post-GE14 macro policy uncertainty could have a slight dampening effect on the banking sector’s growth. As such, we believe the sector is unlikely to chart the same degree of outperformance prior to GE14. However, earnings downside risk is partly mitigated by strong cost discipline (+2% to +3%) and a manageable credit cost growth environment. Given this scenario, we reckon the sector could mirror the FBMKLCI’s performance in 2H18 with a slight upward bias as asset quality remains stronger than expected. Upside risk to our call could come from an additional OPR hike in 2H18 that would be positive for NIM.
• Current sector valuation is fair. Sector valuation has declined by 7% post GE14 to 1.35x 2018F P/B, which is fair against a forecast ROE of 10.6%. Although P/B is at -0.5SD below the 10-year historical mean of 1.60x, we note that structurally, the ROE has compressed significantly from a high of 16.0%. CIMB (BUY/Target: RM7.40) remains our top pick, given its current 2018 PBV and PER valuations stands at -1SD to its 10-year means P/B and PE valuations. A potential Hyflux-related provision remains an overhang for Maybank (HOLD/Target: RM10.20). For Public Bank (2.4x P/B FY18) and Hong Leong Bank (1.6x P/B FY19), we believe their stable and defensive franchises have largely been reflected in their premium valuations, which prompts us to maintain our HOLD recommendation.

Source: UOB Kay Hian Research - 6 Jun 2018