We continue to see improving trajectory in ESG scores for majority of the banks under our coverage (Affin, Alliance, CIMB, Public, RHB), indicating the level of commitment towards ESG has been growing. Currently, Maybank and RHB are both tied for first place with the same high ESG grade s while Alliance remained at the bottom of the rankings (despite making strides to elevate its rating). With better sector ESG performance and undemanding valuations, we believe this is an opportunity to buy banking stocks. Retain OVERWEIGHT on the sector. We have BUY calls on Maybank, Public, RHB, BIMB, and Affin.

ESG results round-up. From our proprietary Environmental, Social and Governance (ESG) scoring model, we find 5 banks under our coverage showed YoY improvement in 2020 (Affin, Alliance, CIMB, Public, RHB) while the other 3 declined (AMMB, BIMB, Maybank). Recall, we chose key focus areas that have quantifiable ESG data to work with and identified 16 parameters to analyse. For each criterion, we ranked the banks under our coverage universe in order of merit by assigning ‘8’ to the highest and ‘1’ to the lowest graded financial institution. If there was a draw, the same amount of points will be allocated to the banks for that specific rank, while the remaining will follow the original ranking points arrangement; for example, A and B are tied for first place, both get 8 points respectively, while C who ranks third will only get 6 points. After that, we tallied up the points, scoring them out of 5, and performed a relative comparison.

More ESG winners… In 2020, Affin saw the steepest ESG grade improvement of 1.1 points, thanks to areas of social (growing number of female leaders) and governance (more board independence and participation). Next in line we have RHB (+0.6 points) due to better governance score, again from higher % mix of independent directors and meeting attendance rate. As for Alliance (+0.3 points), CIMB (+0.2 points), and Public (+0.2 points), they gained traction at the social category: (i) Alliance was successful in increasing their talent retention rate, (ii) CIMB brought in more female directors and charitable cost as % of its bottom-line was higher than a year ago, (iii) Public invested more in employee development and learning.

… than losers. For decliners, BIMB experienced the biggest fall (-0.8 points), bruised by lower marks for social (trailing peers in the scope of female director composition, philanthropy efforts, staff development) and governance segments (decrease in board meeting attendance rate). On the other hand, Maybank and AMMB dropped 0.3 points respectively because of weaker social score. We note that they were both hit by the decline in female director mix, employee training hours, and community investments. In addition, higher staff attrition rate dragged the former’s social rating.

Keep OVERWEIGHT. Overall, we continue to see improving trajectory in ESG scores for majority of the banks under our coverage, indicating that the level of commitment towards ESG has been growing. Now, Maybank and RHB are tied for first place with ESG grade of 3.8 (out of 5) while Alliance remained at the bottom of the rankings with 2.3 points; the formers excelled in areas of environmental and governance, whereas the latter was still fairly weak in all ESG categories (but is making strides to elevate its rating). With better sector ESG performance and undemanding valuations, we believe this is an opportunity to buy banking stocks. For large-sized banks, we like Maybank (TP: RM9.40) for its strong yield and Public (TP: RM4.50) for its resilient asset quality. For mid-sized banks, RHB (TP: RM7.00) is liked for its high CET1 ratio and attractive price point. As for small-sized banks, BIMB (TP: RM3.45) and Affin (TP: RM2.25) are favoured; we like the former for its positive structural growth drivers and better asset quality while the latter has value unlocking potential at its asset management arm.

Source: Hong Leong Investment Bank Research - 14 Jan 2022