Easing monetary conditions supportive of continued growth not only help to stabilise asset quality, but also pushing loan growth and improving prospects of recoveries. These, coupled with the sector being undervalued, in our view, as the larger banks have largely underperformed year-to-date are reasons why we have maintained the sector at OVERWEIGHT. Valuations are attractive and undemanding with all banks under our coverage rated as OUTPERFORM except for HLBANK (MP, TP: RM17.30). While we expect a mild impact to top-lines (negative on NIM but positive on credit demand), bottom-lines are likely to be enhanced as impairment allowances are reduced. Our Top Picks are ABMB (OP, TP: RM3.45) and CIMB (OP, TP: RM6.45), which we believe are prime beneficiaries from M&As and tie-ups.

YTD, the KL Finance Index (KLFIN) has continued to underperform the FBMKLCI with negative returns of 10.7% versus FBMKLCI’s -5.8% on recession worries exacerbated by the on-going trade tensions globally. The sector’s underperformers were mix, led by ABMB (-23%), HLBANK (-20%) and PBBANK (-19%), on concerns of underperforming SMEs (ABMB) and China’s slowdown (HLBANK). On a positive note, ease of concerns from its O&G portfolio and Aabar Investments reducing its stake in RHBBANK drove the bank to be the second best performer (+7%) behind BIMB (+11%) which proposed restructuring seemed to be dithering.

Lacking catalyst, the improving sector are masked by current concerns over tepid domestic loans growth, spread compression, volatile capital markets and an uncertain global environment, no thanks to trade-war related issues. While the prevailing sentiment is cautious due to a generally down-beat economic outlook globally, selective loans and approvals lend to a stable outlook that supports a moderate and stable credit charge for the industry. Banks with healthy asset quality (hence, low impairment allowances) will still be in favour for their defensive quality. We believe a more visible picture from Budget 2020 will give clarity and support for the domestic economy, supporting loans growth. The May 2019 OPR cut will support the banks’ bottom-line as credit charge will likely be lower on account that probability of default will be lower with faster recovery rate as interest is reduced. From the OPR cut, we do not expect any significant impact on the top-line as we believe that the cut is only to necessitate demand for the banks to achieve their loan targets for 2019. In fact, we believe that the cut will support the banks’ bottom-line as credit charge will likely be lower on account that probability of default will be lower with faster recovery rate as interest is reduced as mentioned earlier. Our industry loans’ forecast for CY2019 is maintained at +4.9% on account clarity and certainty post budget 2020.

We could probably see the emergence of M&A talks in the banking sector as well, which may act as a major market catalyst. Prior to the consolidation of the banking sector in 2006/07, the valuations for the banking sector, as per the KLFIN Index, were trapped at ~16x PER or ~1.6x PBV. At the height of the banking consolidation activities, these valuations charged to >20x or ~2.5x respectively.

Valuations on the stocks in our banking universe are undemanding with all of the stocks at OUTPERFORM with the exception of HLBANK (TP: RM17.30) at MARKET PERFORM. With potential total returns at >17% we reiterate the sector at OVERWEIGHT.

Source: Kenanga Research - 2 Oct 2019Source: Kenanga Research - 2 Oct 2019