Banking - NEUTRAL - 28 March 2012

kiasutrader

Publish date: Wed, 28 Mar 2012, 11:40 AM

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). MAYBANK (OP, TP: RM10.40)and PBBANK (OP, TP: RM15.50) also remain on our OUTPERFORM ratings as the twooffer reasonable dividend yields. We have however lowered our rating for AMMB(MP, TP: RM6.70) to a Market Perform from an Outperform due to its limitedupside from its current share price. Meanwhile, we are maintaining our MARKETPERFORM ratings on HLBBANK (MP, TP:RM10.90) and AFG (MP, TP:RM3.70) onvaluations ground.

The 4Q11 result trend and outlook saw the banking sectorposting a flat QoQ earnings (1.0%) with underlying profit growth momentumclearly having stalled. Going forward, there are limited opportunities to drivethe sector earnings growth materially beyond our current expectation of a high singledigit growth, given the on-going margin headwind and limited credit chargedsurprise. The 4Q11 reporting period wasalso somewhat uninspiring for the market. Apart from the decline in capitalmarket revenues, in our view, the flat quarterly profit growth through 2011 wasactually due to the lack of policy rate rises. Non-interest incomes continue toexperienced a material decline (-7.3% YoY). We also expect softer tradingcondition to persist in the short term due to the ongoing global economicuncertainties.

Margins emerging signs of softness without any furtherinterest rate hike (-11bps YoY, on average). We believe the margins willcontinue to face a modest headwind in 2012. Credit demand was strong however (11-15% on average vis-''-vis nominalGDP growth of 5.0%) despite the weak external outlook. Going forward, we areforecasting just a low teens credit growth to be driven by the start of theETPrelated projects. Provisioning on newimpaired assets has been reduced but the credit charge is already low. Capitalin the sector remains strong (Industry T-1 Cap Ratio of 12.0% and RWCR of15.9%) ' which is well positioned for Basel 3. This include PBBANK (CCR: 10.7%RWCR: 15.9%) that was previously deemed as being under-capitalised. Going forward, the capital ratio is expectedto remain healthy in supporting lending growth.

Earnings growth islimited. Given our view thatresponsible finance will promote a healthy household lending growth, momentumof the loan growth will hence be lower for a period. As such, our base case forthe system loan growth is broadly in the low teens only. Together with theon-going margin headwinds and limited provisioning surprise, there are limitedopportunities to drive the sector's earnings growth materially beyond ourcurrent expectations of high single digit.

Current valuations. Current valuations of the sector have gone upand the upside from here seems tight after rising 18% as measured by the KLFinancial Index from the October 2011's low. With earnings growth in the rangeof high single-digit to low teens, together with the already tight valuation,we

believe valuation multiple expansions are thus unlikely.Hence, we are increasingly looking to other factors to drive our rating recommendationssuch as M&As opportunities instead of organic growth.

The major bank valuations are 'at the middle of the ranger'of their historical mean valuations, which has typically represented their'fair values' and this will also somewhat cap their absolute performance apart fromthe current uncertain external economic outlook.

To ride on 2Q2012news flows. For stocks, although our Target Price for RHBCAP has beenreduced (due to relative weak earnings), its discount valuation remainssupported by better growth prospects for the year ahead from its potentialmerger with OSK. Following the reporting season and the strong rebound of a fewanchor banks from their October 2011's low i.e. MAYBANK (+5%), PBBANK (+8%), AMMB(+2%), our pecking order has now changed to 1) RHBCAP and 2) CIMB withpotential M&A news flows to rerate these stocks' valuations. Meanwhile,thus far, the foreign shareholding of CIMB is still at its 18-month low despitethe increasing foreign net buying on Bursa Malaysia.

Source: Kenanga