Investment Highlights

• Foreign holdings in Malaysian Government Securities (MGS) in April 2018 rose to RM170.7bil (+RM4.8bil MoM) from RM165.9bil in March 2018. This was also higher than Dec 2017’s RM164.4bil. Percentage-wise, foreign holdings of MGS increased to 46.4% in April 2018 from 45.6% in March 2018 and 45.1% in Dec 2017. Despite the increase in foreign holdings of MGS, the local 10-year bond yield has trended higher. In April 2018, the 10-year Malaysia bond yield rose to 4.03% vs. 3.95% in Dec 2017.

• For other countries in Asia, namely Thailand, Indonesia and the Philippines, government bonds yields have also increased (see Exhibit 2). The increase in bond yields in Asia is seen pressured by the rise in the yields of US Treasury which continued to climb from 2.41% in Dec 2017 to 2.87% in April 2018.

• Besides, there were also some pressure on MGS yields in the early trading hours yesterday in a knee-jerk reaction due to the unexpected outcome of the 14th general election. Nevertheless, the pressure was seen to subside towards the second half of the trading day. Also, a rebound in the domestic currency to 3.95 vs. the USD was also evidenced at the end of trading yesterday compared to the lowest level of 3.98 in the morning session.

• Overall, the fundamentals of banking stocks are expected to remain intact with the domestic economic growth still expected to be on positive trajectory notwithstanding a change in the government. Despite the knee-jerk reaction to the prices of banking stocks yesterday, the reforms to be undertaken are expected to have a positive impact on the economy and the sector in the longer term.

• Meanwhile, the asset quality for banks’ domestic operations is expected to remain stable while that of the overseas operations is anticipated to gradually improve.

• We have rolled forward our valuations for banks with the financial year ending December from FY18 to FY19. Exhibit 3 shows our revised valuations for banking stocks under our coverage. We have factored in slightly higher risk premiums into the valuations of CIMB, RHB Bank and Maybank to account for uncertainties in capital market activities for infrastructure projects which may see a delay in the issuance of bonds/sukuks. This is in view of the fact that the major public projects will be reviewed by the new government.

• In the short term, sentiment is expected to be more positive on banks with low beta and those that have strong consumer banking franchise. These are Public Bank, Hong Leong Bank and BIMB Holdings which are anticipated to benefit from the potential improvement in consumer spending as a result of higher disposable income from the impending abolishment of the GST and reinforcement of fuel subsidy. Hong Leong Bank is already trading at a rich valuation hence we continue to have a HOLD call on the stock.

• With the fundamentals remaining sound, we maintain OVERWEIGHT on the sector with BUY calls on Public Bank (FV: RM26.20/share), BIMB Holdings (FV: RM5.40/share), RHB Bank (FV: RM6.20/share) and Alliance Bank (FV: RM4.40/share). We still have a BUY call on RHB Bank due to its cheap valuation, with the stock trading at 0.8x to our FY19 BV/share.

Source: AmInvest Research - 15 May 2018