Growth prevails. The sector is plagued by concerns of tepid domestic loans growth, spread compression, volatile capital markets and an uncertain global environment, no thanks to the US-China 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. The lack of further clarity from Budget 2020 and the protracted trade war further had compounded the Banks’ performance in 4QCY19. Despite the underperforming KL Financial Index, banks continued to be resilient, showing growth as top-lines continued to grow QoQ and YoY as credit demand remained on an uptick on accommodative interest rates. Despite capital market activities continuing to slumber, fee-based income remained resilient on better treasury gains from investment securities. Earnings, however, continued to be volatile on account of volatile credit costs on concerns of slowing business environment. Asset quality deterioration saw a slight uptick but mostly from Business while Households saw stability underpinned by the banks’ prudent asset selection and accommodative interest rates. Further confidence in the banks’ asset quality are highlighted by the trending down of the banks’ loan loss provisions QoQ and YoY supporting the view that credit charge will be benign ahead.

The current monetary policy seemed poised for a fiscal impetus. The low inflation environment speaks volume for benign interest rates that will prompt credit demand from both Households and Business. A more aggressive fiscal policy will certainly support credit demand especially from Corporates. We see a pickup in 2HCY20 on easing trade tension, global demand for technology and resurgent of mega projects on account of accommodative interest rates and fiscal push. This will easily translate into a stable and resilient economy coupled with low unemployment. We expect the domestic loans for 2020 to grow at +5.2 to +5.5% underpinned by Household spending and also likely to be supported by Business especially in 2HCY20. Our industry loans’ forecast for CY2020 is maintained at +6% vs CY2019E of <+5%.

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 up to >20x or ~2.5x respectively. Coming to the tail-end of a 10-year cycle, the long-anticipated recession fear is likely over with accommodative rates prompting a fiscal push. With such undemanding valuations, renewed interest in banking stocks are likely to return to investors’ radars.

Most of the stocks’ valuations in our banking universe are still undemanding; hence, most are rated at OUTPERFORM with only BIMB and RHBANK at MARKET PERFORM. Valuations are undemanding as most of the stocks in our banking universe are trading at below their 5-year mean PBV. We reduced BIMB and RHBBANK to MARKET PERFORM given the recent clarity and timing of its restructuring plans (BIMB) and share price appreciation (RHBBANK). Our Top Pick for the sector is CIMB and MAYBANK. We like CIMB due to: (i) its potential corporate loan traction both in Malaysia and Indonesia given the impetus of fiscal spending ahead, and (ii) its stable asset quality motivating higher appetite or riskier loans. For MAYBANK, being the largest bank, it will be the biggest beneficiary of resilient household spending on a pickup in the domestic economy.

Source: Kenanga Research - 2 Jan 2020