Macquarie Equities Research (MQ Research) initiated coverage on Malaysian banks ahead of the upcoming Budget 2020 this Friday and Bank Negara’s meeting next month. While CIMB is MQ Research’s top pick, MQ Research generally favours corporate banks over consumer banks, with Maybank as the preferred bank for the defensive-minded. Read on for more.

Initiate on the big 3: CIMB > Maybank > Public Bank

MQ Research initiates coverage on Malaysian banks with an Outperform rating on Maybank (TP: RM9.00) and CIMB (TP: RM6.15), and a Neutral on Public (TP: RM19.90). MQ Research’s top pick is CIMB with a 28% total shareholder return (TSR). Valuations are undemanding at 0.9x price-to-book (P/B) ratio, -1 standard deviation. Modest execution of 5-year strategy, “Forward-23”, leveraging Indonesian/Thai platforms should drive medium-term outperformance vs relatively stagnant domestic-centric peers.

For the defensive-minded, MQ Research prefers Maybank over Public – as per MQ Research’s preference for corporate over consumer banks. Maybank’s diversified earnings base underpins resilience and support the current 7% dividend yield; sector-leading across Asean. MQ Research’s bull case for CIMB is RM7.80 vs MQ Research’s bear case for Public of RM17.20.

What if there are no overnight policy rate (OPR) cuts in November?

In a no rate cut scenario Public/Maybank/CIMB FY20 net profit should see a +2.8%/ +2.5%/+1.4% impact (Fig 16). While a -25bps rate cut is highly consensus, MQ Research believes the central bank’s decision could be closer to a coin toss than most might expect. There is ample liquidity in the banking system; weak demand is the problem.

Cutting rates is akin to pushing string – not very effective. But, fiscal stimulus would be. The expansionary Budget 2020, coupled with resilience in the upcoming macro data, could be the swing factor to defer the rate cut, allowing Bank Negara to save its monetary bullets for later.

Corporate Banks Over Consumer Banks

Tepid housing/auto loans growth vs. a constructive view on business sentiment into FY20 underpins MQ Research’s preference for corporate banks over consumer banks. Budget 2020 stimulus and policy clarity should wane the wait-and-see attitude that has paralysed investment over the past year. Maybank, with 33% of loan book in working capital (vs 24% and 12% for CIMB and Public), is best positioned for the upside. Public’s >67% mortgage exposure makes it most vulnerable to housing slowdown.

Lower growth + stable asset = better dividends

MQ Research expects asset quality to remain resilient, barring systemic shocks to the economy. Uptick in provisions is expected, but more of the same from 1H19 - driven by a handful of specific corporate accounts. MQ Research has assumed +2/+9/+2bps loan loss provision (LLP) to 33/50/7bps for Maybank/CIMB/Public.

In the absence of asset quality deterioration, Public’s sector-leading 5-7bps LLP will not have a chance to shine. Coupled with slower loans growth and substantially adequate capital ratios, MQ Research expects banks to return more capital to shareholders, which will lift return on equities. CIMB has the most dividend upside, a dividend reinvestment plan roll-back a la Maybank in 2Q19. Public has most upside to payout ratios.

Source: Macquarie Research - 10 Oct 2019