Stocks in our banking universe mostly saw a reversal in fortune over the past 3 months while succumbing to volatility in share prices. In this piece, we examine how much further stock prices may fall as investors are spooked by news of potential resignations of CEOs of governmentlinked companies (GLCs). In terms of valuation, the sector is now at 1.3x P/BV (-0.4SD) and 12x P/E (at mean) on a 1-year forward basis. Compared to the lows of 2009, sector P/BV touched 1.13x while P/E touched 8.9x. In our view, fundamentals of the Malaysian banks remain long-run positive even though there could be changes at the top. Maintain OVERWEIGHT. Top picks: Maybank and Aeon Credit.

Fallen But Yet to Have Reached All-time-low (Fig 1-18)

Share prices of Maybank, CIMB and Public Bank (PBB) saw the largest stock price correction in the last month, but on a 12-month basis, the share price for PBB is still up 12.4% vis-a-vis negative returns for Maybank and CIMB. Drawing from historical price multiples, Maybank’s share price dipped to a P/BV multiple as low as 0.9x (Feb’09) vs. CY18E P/BV of 1.3x. Meanwhile, CIMB’s share price dipped to as low as 0.78x (Jan’16) vs. CY18E P/BV of 1.0x. Other financial stocks which saw recent pullback include Alliance, Hong Leong Bank and non-bank Aeon Credit, but given their strong fundamentals, we believe that this presents a buying opportunity. Given PBB’s high foreign shareholding of 39.1% (end-May’18), we believe that there may be downside risks to stock price, which is now trading 2.38x P/BV vs. its low of a 2.0x P/BV (between Oct’15 to Nov’17).

Rerating Factors for the Banking Sector

Should valuations stay low for certain banks, i.e. with P/BV multiple at below 1x, we are of the view that industry M&A activities could emerge, driven by the larger-sized banks with more robust ROE levels.

Maintain Overweight. Sector Top Picks – Maybank and Aeon Credit

We reaffirm our OVERWEIGHT sector stance, barring unforeseen circumstances. The sector is currently trading at a 2018E P/BV multiple of 1.3x vs. the past-10-year average of 1.47x. Our top picks are: Maybank (MAY MK, RM9.00, BUY, TP: RM12.00 based on a 1.74x 2019E P/BV target), which remains an aggressive player in the banking and capital markets. Operationally, we expect stable fund-based income and NIM; ii) Aeon Credit Service (ACS MK, RM13.78, BUY, TP: RM18.40 based on a 13x CY19E P/E target), whereby we are more positive on its outlook driven by firmer receivables yields and value-chain transformation initiatives.

Source: Affin Hwang Research - 27 Jun 2018