In our pair-trade thematic sector piece, we remain upbeat on Hong Leong Bank (HLB, BUY, PT RM18.50 at 1.5x P/BV target) while advocating that investors take some profit off CIMB Group (HOLD, PT RM6.65 at 1.25x P/BV target) which has limited upside potential of 1.5%. We are of the view that HLB has more catalysts and earnings drivers that could continue to attract investors, while they might not favour CIMB’s likely elevated provisions in 2018 (at credit cost <60bps) due to a tough operating environment overseas. Maintain sector OVERWEIGHT. Top picks: HLB and Maybank.

Hong Leong Bank Has the Potential to Outperform Within the Sector

Amongst the banks in our universe, we are of the view that HLB has the potential to outperform with an upside potential of 8.8% based on our PT of RM18.50. Meanwhile, we believe that earnings drivers such as likely stronger earnings from Bank of Chengdu, a digital transformation and potentially a special dividend (arising from profits on an asset sale, details on page 2) could continue to excite investors.

Take Money Off Banks With Weaker Earnings Outlook

Though we currently do not have any sell ideas within the banking sector, we think investors should take money off the table from CIMB Group (upside potential 1.5%, HOLD, PT RM6.65) as well as RHB Bank (upside potential 2.9%, HOLD, PT RM5.20) as both are trading near our price targets. Our concerns on CIMB Group centre on a potentially weaker NIM and elevated provisions (lack of credit recoveries) while for RHB, its weaker asset quality and the need to raise its loan loss cover to 100% (Sept17: at 93.6%) could indicate potential downside risk on credit cost.

Maintain Overweight. Top Banking Sector Picks – Maybank and HLB

We reaffirm our OVERWEIGHT sector stance. The sector is currently trading at a 2018E P/BV multiple of 1.3x, vs. the past-10-year average of 1.62x. Our sector top picks remain unchanged: i) Hong Leong Bank (HLBK MK, RM17.00, BUY, PT: RM18.50 based on a 1.5x CY18E P/BV target) leverages on ample balance sheet liquidity (LCR 119%; LDR 81.8%), while benefiting from its digital transformation initiatives. We expect its 20%- owned Bank of Chengdu to see stronger contribution in 2018; ii) Maybank (MAY MK, RM9.80, BUY, TP: RM10.50 based on a 1.5x 2018E P/BV target) remains an aggressive player in the banking and capital markets. We are upbeat on its digitisation initiatives while expecting stable fund-based income generation and a steady NIM.

Source: Affin Hwang Research - 5 Jan 2018