KUALA LUMPUR (Sept 4): Malaysian banking stocks have further upside now, though investors should lean towards safety at a time when bad debts could creep up as lenders take on more risks, said Kenanga Investment Bank.

Banking stocks have gained as investors bet on stronger economic growth, but there is a possibility of overlending to match market demand, Kenanga flagged in a sector note. That may in turn expose banks to an excessive risk build-up in their portfolios granted by a few large projects, the house said.

“While we are encouraged by the promise of large projects ahead, we are mindful that banks may have the inclination to take on excess credit risk in chasing loans,” Kenanga said. “Rather than being too top-line-focused, we favour banks with a more disciplined approach.”

Shares of Malaysian banking stocks have rallied this year, led by a 52% surge in Affin Bank Bhd (KL:AFFIN), benefiting from a recent surge in foreign inflows as proxies to the country’s improving economic growth outlook.

Foreign institutional investors have also been buying Malaysian stocks amid a stronger ringgit, following recent upgrades by JPMorgan, Goldman Sachs and Nomura.

All 10 listed banks' net profit for April to June largely met expectations, though target prices for some stocks are now 4% and 22% higher, thanks to better valuations, Kenanga said.

Near-term fundamentals for the sector also remain intact, the house said, keeping its ‘overweight’ call.

The house also upgraded Alliance Bank Malaysia Bhd (KL:ABMB) to ‘outperform’ in the list that also includes AMMB Holdings Bhd (KL:AMBANK), Hong Leong Bank Bhd (KL:HLBANK), Malayan Banking Bhd (KL:MAYBANK), Public Bank Bhd (KL:PBBANK) and RHB Bank Bhd (KL:RHBBANK).

For strategy, Kenanga has Public Bank and Hong Leong Bank as its top picks, due to their industry-leading asset quality, with gross impaired loan ratios — debts deemed unrecoverable as a percentage of total loans — at 0.5%-0.6% supported mostly by collateralised loans.

The house also likes RHB Bank for its dividend yield of around 7%, which offers capital downside buffers and also the chance of better earnings in the second half of the year.