Kenanga Research & Investment

Banking - Far From Being in Shambles

Publish date: Fri, 31 Mar 2023, 09:27 AM

We maintain our OVERWEIGHT call on the sector. The recent collapse of certain US banks (Silicon Valley Bank, Signature Bank) and abrupt takeover of systemically important Credit Suisse by UBS have unnerved many on the integrity of the global financial system. The consensus view points to factors leading to the debacles being idiosyncratic, and by most measures, have been contained. Locally, we believe the landscape remains highly sound and stable with limited risk of contagion, with key notes being: (i) continued economic expansion, albeit lower from CY22 higher growth base (in line with our CY23 industry loans growth target of 4.0%-4.5% from CY22 of 5.7%), (ii) tight and adequate capital and liquidity controls, (iii) well-guarded asset quality and provision management, and (iv) limited direct exposure to non-ASEAN markets. Meanwhile, we believe OPR will remain steady state at 2.75% throughout CY23, giving banks and the economy space to adjust against inflation headwinds. That said, we understand that current investor sentiment could be wavering and may demand safer bets to remain invested. Hence, our sector top picks are: (i) PBBANK (OP; TP: RM4.90) for its stellar asset quality and highly collateralised loans portfolio, a fair trade-off for lower-than-industry growth, and (ii) RHBBANK (OP; TP: RM7.10) for its leading CET-1 and refreshed dividend potential (c.7% yield) serving as a high-yield alternative.

Safe from a perfect storm? The ongoing commotion in the global banking scene appears to be mainly rooted in mismanagement and nonchalance on concentration risks. We summarise the key banes to be: (i) lackadaisical capital and liquidity management, (ii) investment risk oversight against developing macros, and (iii) heavily skewed and undiversified customer profiles. While the intense hike of US Fed rates (+475 bps since March 2022 vs. BNM’s OPR +100 bps since May 2022) is partially pointed as one of the catalysts, we believe better control of the above could lead to different outcomes. On the contrary, we have evaluated key readings between Malaysian banks which we believe are largely sheltered against similar occurrences. This is thanks to tight regulation imposed by BNM to ensure strict adherence to capital and risk management, also enabled by frequent stress testing and scrutiny.(refer to the overleaf our analysis at “A Case to Favour Malaysian Banks”)

Local macros remain firm. We opine that the stability of the Malaysian landscape would be reason enough for investors to stay invested with the banks. The country is still expected to ride on a more modest recovery path, with our in-house CY23 GDP expectation of 4.7% (CY22: 8.7%). This is carried by strong export-driven manufacturing industries which could be supported by reopening economies. Meanwhile, the overall services industry could remain intact as the retail, food & beverages and tourism sub-segments could still be in demand, albeit with possible moderation as consumers may down trade in the face of general inflation. All in, we perceive this to be supportive to the strength and stability of the domestic financial system, as opposed to more heavily inflation-affected markets such as the United States (CY22 GDP: 2.7%, CY23 consensus estimates: 0.9%). This is also apparent in respective Dec 2022 CPI inflation readings of 3.3% and 6.5% for Malaysia and the United States.(refer to the overleaf for further commentary on industry fundamentals)

Earnings expected to expand in spite of shaky top line. Looking towards 1QCY23 earnings, the banks are anticipating similar shifts of slower fund-based income on the back of abating loans growth and softer interest margins as price competition for deposits heightens. On the flipside, non-interest income which were previously dragged by subsequently lower investment returns are expected to normalise. This could be chiefly led by the absence of hefty fair value losses from fixed income securities on stabilising interest rates. Meanwhile, more active trading conditions could boost brokerage performance while also encouraging fee-based income streams, namely wealth management. Ultimately, while income streams may show mixed signals, we opine that the banks should collectively reflect easing credit cost numbers, with some hints of write-offs as Covid-related provisions could lapse. In addition, the ending of prosperity tax would be a definite blessing to bottomline, with some banks previously seeing effective tax rates of c.30%. Within our coverage, we still anticipate a commendable c.12% increase in FY23 earnings across the sector.

Maintain OVERWEIGHT on the banking sector. We continue to believe that the fundamentals of the banking sector is well grounded and is not likely to experience any pressures which gravitates anything close to what is happening abroad. That said it is understandable if investors prefer to stay on the side line as global sentiment for the financial sectors have tumbled. While this could present numerous buying opportunities across our coverage calls, we opine to selectively promote names which offer greater safety nets amongst its peers. We also avoid banks with a higher non-interest income exposure as investors may also view this space with greater caution. With that, for 2QCY23, we opt to promote: (i) PBBANK as it is the leading bank in terms gross impaired loans (GIL) reading at 0.4% (vs peer average: 1.5%) backed by a highly collateralised loans book thanks to a substantial mortgage portion (41% of total books). Meanwhile, its recent shares sell-down owing to uncertainties of its shareholder and ownership structure may see an inversion when clarity on the matter unfolds. We also like (ii) RHBBANK as we believe the relevancy of strong capital safety will be in the limelight once more. RHBBANK continues to lead its peers with its CET-1 buffers (17% vs peer average: 14%). On the other hand, RHBBANK’s dividend prospects become more promising with targeted payouts of c.55% looking to generate yields of 7%-8%. Also, developments on its upcoming digital bank with Boost could support interest.

Shaky start of the year. Unlike CY22, banking stock shares experienced mixed performances in relation to key indices. Despite having reported commendable 4QCY22 earnings in Feb 2022; YTD-Mar 2023, only HLBANK (OP; TP: RM23.35), MAYBANK (OP; TP: RM10.10) and RHBBANK have outperformed the FBM KLCI and Bursa Financial Index, albeit still lower than when they started the year. We see these names to be credited as more conservative bets by investors for their asset quality safety and dividend returns. Notably, although PBBANK also demonstrated strong earnings (beating our FY22 forecast), concerns over its shareholdings structure has led to some apparent profit taking since Dec 2022. BIMB (MP; TP: RM2.30) was the main underperformer possibly due to guidances that asset quality could lag from inflation-led affordability concerns, owing to its high retail portfolio.

Source: Kenanga Research - 31 Mar 2023

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