We conducted a review on the sustainable financing practices of bankswhere we highlight PBBANK (MP; TP: RM4.65) and ABMB (OP; TP: RM4.20) as our favourites. These two names performed strongly in our review with a relatively moderate exposure in possibly “ESG vulnerable” activities. ABMB has been fully committed in zero coal financing while PBBANK (with other names) have established a firm ESG exclusion list. Meanwhile, the two banks are solid contributors in sustainable products, having a relatively high proportion of green financing against their overall books with aggressive targets toboot. Maintain OVERWEIGHT on the banking sector for better loans growth trajectory and OPR-led margins expansion.

Started with the Paris Agreement. In 2016, the Paris Agreement was signed by 196 global representatives (including Malaysia) as a call for more proactive measures to combat climate change. Its long-term temperature goal of keeping the rise in mean global temperature to well below 2 °C (3.6 °F) above pre-industrial levels and limit the increase to 1.5 °C (2.7 °F) is the leading catalyst in driving initiatives to boost sustainable practices.

Greener actions from the banks. The adoption of sustainable/green financing is becoming more widespread with financial institutions taking charge as a leading catalyst for economic growth. Through the facilitation of crucial financial services, banks are at the forefront of promoting and accelerating the transition of their clients to more sustainable operating standards and lifestyle. For this, BNM released its Climate Change and Principle-based Taxonomy on 30 Apr 2021 to guide financial institutions on various elements which could make their evaluations more comprehensive. This document highlighted risk assessment criteria as well as remedial measures that could be implemented to allow for a more effective transition.

For this review, we look at three possible considerations which ESG investors may evaluate between banks, being:

(i) Possible exposure to environmentally-linked financing activities – how dependent the bank is on non-environmentally friendly financing to sustain its profits.

(ii) Pledges to prohibit environmentally detrimental financing – whether a bank has made the commitment to focus on less damaging business sectors.

(iii) Advancements in sustainable finance products – how much does a bank contribute towards the overall adoption of green financing products.

(refer to the overleaf for details of our studies)

Opportunities are present and abundant. Post review, we gathered that all banks arecognizantof the necessary changes to be implemented to encourage sustainable practices to mitigate climate change. While some banks may be progressing faster than others, we do not discredit the progress made by the rest. For now, we believe the growth projections of sustainable financing should be in sync with our overall expectations on the industry, tapping into economic recovery and the reopening of borders to support business activities. Although household loans may taper off on higher interest rates, competitive offerings on retail green energy financing products may spur interest. Post review, we raise our TP for PBBANK (MP) to RM4.65 (from RM4.45) and ABMB (OP) to RM4.20 (from RM4.00) from our newly awarded 4-star ESG rating. We believe these two names have solid foundation on ESG efforts, namely for their strong involvement in sustainable financing. The call and TP for the rest of our coverage remains unchanged. Maintain OVERWEIGHT for the banking sector.

Source: Kenanga Research - 12 Aug 2022