Despite the consensus for economic outlook being skewed towards somedegree of recovery, we noted thatyear-to-date,institutional investors have taken a cautious stanceonthe financial sectorand have been reducing suchpositions. Foreign investors have also showed less favour in our banks but this has been a prevailing trend since 2019 possibly as Malaysiais perceived to bea dicier bet onbureaucratic factors as well as Covid-19impact. That said,we believe there is little cause of concern as share prices and valuation levels for the sector have remained relatively stable thatcould help propelastronger upward trajectory whenthese investors return. To recap, our optimistic outlook for the banking sector is anchored by: (i) our in-house view for 2021 GDP growth of6.5%,(ii)no further downside toOPR, (iii) easing credit cost from heavy pre-emptive provisioning in 2020,and (iv)apotentially extended low CIR environment.Hence, maintain OVERWEIGHT with our top picks being: (i) MAYBANK (OP; TP: RM10.60) for dividend prospects (7-8% yield), and (ii) RHBBANK (OP; TP: RM6.25) for capital safety.

(Refer to overleaf for charts retrieved from the Dibots analytics platform and our Beta findings)

Some offloading at hand. From 2019-2020, institutional investors had been accumulating stocks in the financial services industry and added RM8.7b worth to their portfolios, albeit some hiccups were seen during the Covid-19 induced MCO. However, recent findings from Dibots pointed out that the same basket of stocks was being de-institutionalised with YTD net selling of RM1.4b. We suspect that funds could be closing some favourable positions made during 4QCY20. It could also be argued that this is spurred by the softening confidence in economic recovery due to the MCO 2.0 from mid-Jan 2021, driving the need to de leverage from the sector. On the flipside, we gather that foreign investors have constantly been net sellers which was truly market-wide at the height of the US-China trade tensions during the Trump Presidency and added by uncertainties in the domestic political climate.

The abovementioned recent trends could have led to the rise in Beta levels for the banking stocks within our coverage. The highest amongst them would be PBBANK but this could be viewed with some discretion as it saw high trading volatility from its 4:1 bonus issue.That said, we do not think that this should be a cause for concern for the sector.

In spite of these indicators, we highlight that the banking sector has been relatively stable YTD. Both price and valuation levels have remained somewhat flattish, suggesting that investors’ support are still mostly intact. To offer a brighter perspective, the deleveraging of institutions within the sector could allow for stronger upward bias price momentum if funds were to reposition. The higher retail investor mix currently is also great for liquidity to spur further participation into the sector.

Maintain OVERWEIGHT on the Banking Sector. We continue to view the sector positively as a sound proxy of the impending economic recovery as business and spending outlook normalises with the rolling out of vaccination efforts. Our in-house view for 2021 GDP growth of 6.5% is in line with BNM’s forecast of 6.0-7.5%. Even if loans and net interest income growths remain tepid and vaccination progress is slower-than-expected, we believe banks could continue to yield earnings growth having implemented leaner cost structures amidst the tight operating environments during the height of the MCO. Plus, with most impairments being frontloaded in 4QCY20, we anticipate any further provisioning during CY21 to be milder. Our Top Picks are MAYBANK (OP), which we upgraded its TP to RM10.60 (from RM8.75), is favoured for its strong dividend yield potential (7-8%) and ROE prospects, and RHBBANK (OP; TP: RM6.25) which commands an industry leading CET-1 reserve of 16.2% which enables greater allowance to implement capital management strategies.

Source: Kenanga Research - 12 Apr 2021