Still more upside ahead. Following the end of lockdown and the PEMULIH loan moratorium, KLFIN started off strongly, registering +7.6% YTD, lifted by the Fed’s hawkish stance that incentivizes investors to sell growth stocks and buy value stocks. Companies under our coverage with BUY ratings such as: AFFIN, MAYBANK, PBBANK and RHBANK had all outperformed the market (KLCI: +1.43% YTD). Despite a commendable gain YTD, we continue to see more upside in KLFIN as the banking sector is now trading at inexpensive -1SD 1.1x FY22 P/B (Figure#1). Taking the 2008 subprime crisis as a reference, the rally from -2SD to -1SD so far in KLFIN suggests more room to go as the KLFIN rallied 3SD notches and peaked at +1STD during the 2009-2010 recovery period (Figure#2). While we note that the current recovery trend will be relatively rocky compared to the 2009-2010 period due to the heightened geopolitical risk, supply chain disruption and global central banks aggressive tightening policies, we reckon KLFIN should trade near its 5-year average P/B in a conservative stance, supported by solid earnings recovery. Hence, the recent weakness in KLFIN provides a good opportunity for investors to accumulate, in anticipation of a further mean reversal.

The prosperity tax. To recap, the Malaysian government had introduced 33% one-off prosperity taxes on companies with chargeable income over RM100m for the year of assessment 2022. Undoubtedly, after factoring in the prosperity tax, banks' FY22 earnings will witness a muted growth of 0-1% YoY (vs core net profit growth 11% YoY). That said, we believe the market has baked these taxes into forecasts and valuations, limiting shocks and surprises in the upcoming results season. In fact, any irrational sell down (if any) offers an excellent opportunity to accumulate to ride on the 2HFY22 OPR hike and more exciting FY23 earnings.

Just a start. Being a strong proxy to the economy, we believe banks will continue to recover strongly alongside the transition to endemicity. To recap, HLIB expects a +25bps rate hike in OPR to 2% in 2H22 and real GDP advancing +5.5% in 2022. Tracking the economic recovery trend, the 2022 system loan is anticipated to grow by +4.5-5.0% YoY as leading indicators (loan applications) gain momentum. Despite the gross impairment (GIL) ratio up ticked marginally in March – indicating a weakening asset quality – we are not overly worried since banks have made heavy pre-emptive provisions in FY20-21, and we reckon credit risk has been adequately priced in by the market. Given that we are only at the cusp of an OPR upcycle with economic recovery, HLIB remains bullish and maintains an Overweight call in the banking sector. Our top picks include Maybank (TP: RM9.40), RHB (TP: RM7.00), BIMB (TP: RM3.45) and AFFIN (TP: RM2.35).

Pending a breakout. After hovering at 16,489-16,925 over the past 1.5 months, KLFIN is pending for a rectangle pattern breakout. A decisive breakout above 16,925 resistance will spur the index toward 17,443-17,722 zones.

Source: Hong Leong Investment Bank Research - 26 Apr 2022