Banking - NEUTRAL - 12 March 2012

kiasutrader

Publish date: Mon, 12 Mar 2012, 05:25 PM

The banking sector has moved back towards its fair valueover last three months and in our view, can no longer simply be argued as'being cheap'. Following the recent reporting season, our picks for the sectorhave changed for 2Q2012. We continue to like banks with M&As newsflows aswell as those supported by reasonable valuations. Under this strategy, we likeRHBCAP (OP, TP: RM9.60) and CIMB (MP, TP: RM7.90) even if the later is just a MarketPerformer. MAYBANK (OP, TP: RM10.40) and PBBANK (OP, TP: RM15.50) remain on OUTPERFORMratings as the two offer reasonable dividend yields. We, however, lower our ratingfor AMMB (MP, TP: RM6.70) to Market Perform from Outperform due to limitedupside from current trading price. Meanwhile, we maintain our MARKET PERFORM ratings on HLBBANK (MP,TP:RM10.90) and AFG (MP, TP:RM3.70) on valuations ground.

In this note, we look at a summary of themes from the 4Q2011 reporting season and combineit with the respective company's stock prices performance since August 2011 andtheir prospects in 2Q2012. Our findings are as follows.

Themes from 4Q2011 reporting season:

Flat QoQ earnings (1.0%) ' underlying profit growth momentumhas stalled. Going forward, there are limited opportunities to drive itsearnings growth materially beyond our current expectations of high single digit,with on-going margin headwinds and limited provisioning tailwinds.
Non-interest incomes ' experienced a material decline (-7.3%YoY). We still expect softer trading condition to persist in the short term dueto the ongoing global economic uncertainties.
Margins ' emerging signs of softness without a further ratehike (-11bps YoY, on average). We believe the margin will continue to face amodest headwind, in 2012.
Credit demand ' strong outcomes (11-15% on average vis-''-visnominal GDP growth of 5.0%) despite weak external outlook. Going forward, weare forecasting just a low-teen credit growth to be driven by the start ofETP-related projects
Provisioning ' new impaired assets reducing but credit chargeis already low.
Capital remains strong (Industry T-1 Cap Ratio of 12.0% andRWCR of 15.9%) ' well positioned for Basel 3, remained comfortable. Thisinclude PBBANK (CCR: 10.7% RWCR: 15.9%) that was previous deemed as undercapitalized. Going forward, capital ratio to remain healthy in supportinglending growth.

Current Valuations.Current valuations have gone up and upside from here seems tight after rising18%, on KL Financial Index, from October 2011's low. With earnings growth in the range of high single-digit to low teens,together with the already tight valuation, we believe valuation multipleexpansions are unlikely. Hence, we are increasingly looking to other factors todrive our rating recommendations such as M&As opportunities instead oforganic growth.

Pecking order and stock-specific factors to consider for2Q2012:

RHBCAP: It stands out from its peers as it is currently trading at 1.4x BV compared to its long-term average of 1.8x.The current price is still not factoring in its high sustainable ROE of 14% andits growth potential as a real challenger to the current market leaders. Thepotential exit of Aabar from RHBCAP could act as a rerating catalyst and weexpect the valuation to move up soon.

CIMB: At currentvaluation, the market has priced in the risk of its earnings slowing down. However, its 4Q11 result showed some signs ofa turnaround in earnings. Together with two potential acquisitions over nextcouple of months, we do not discount the potential of CIMB share price beingrerated in 2Q2012.

MAYBANK: Highdividend payout with an estimated dividend yield of above 5% continues to makeit an interesting dividend yield stock.

PBBANK: It is still our favourite banking stock givenits solid track records in earnings growth and high ROE achievement. Theconfirmation that there should not be any more capital raising exercise for thebank saw its stock being rerated in the last three months. Improving capitaladequacy would sustain PBBANK's strong growth path and also gives it apotential higher capacity for dividend payout.

AMMB: No majorsurprises on its earnings outlook. However, its strong capital ratio couldpotentially see it paying higher than expected dividends despite its subduedoutlook. Downgraded due to limited upside from current price level.

HLBANK: Thefundamentals for HLBANK are still good although its valuations are notattractive at this juncture. The stock's recent performance has adequatelypriced in any potential synergies (on revenue and cost) in our view. We believethe market has already priced in a 18% ROE at the current stock price valuation.

AFG: Results tobe steady with no major surprises. Strong treasury gain continues to drive itsfee comes growth.

Source: Kenanga