Macquarie Equities Research (MQ Research) initiates coverage on mid-cap banks, naming RHB Bank as its top pick due to the company’s capital management potential. MQ Research also shares its view on the short term impact of digital banks. Other than that, MQ Research also prefers CIMB, Maybank and others.

Initiate mid-cap banks: RHB > Hong Leong > AmBank

RHBBANK (RM6.50 TP; OP): Pretty good, pretty cheap - RHB is MQ Research’s top pick; hardly contrarian, but: RHB boasts 3rd highest returns of equity (ROE) (10.4%) vs second lowest price-to-book (P/B) ratio (0.91x, tied with CIMB) and demonstrable earnings outperformance topped off with dividend upside (financial holding companies common equity tier 1 (FHC CET1): 16.5% vs 40% payout).

HLBK (RM18.70 TP; OP): Good, but not cheap - a quality defensive name and MQ Research’s preferred switch from Public – no succession uncertainty, no technology underinvestment risk, and less ROE convergence pressure. For those with higher liquidity/market cap requirements, switch to Maybank instead. Screens well with both MQ Research’s thematics – disruption and consolidation.

AMM (RM3.85 TP; N): Cheap, but not good – AmBank’s 0.6x P/B ratio is cheap, but for good reason, in MQ Research’s view – weak ROE (8.8%), lack of scale/efficiency, asset quality risk and laggard asset growth. Landing all bull case assumptions implies +17% total shareholder return (TSR), but err on the side of caution, pending demonstrable operational improvements.

Digital Banks: Dismissible or disruptors? Payment disruptors - TnG eWallet (with CIMB), GrabPay (with Maybank) and Boost (still ‘single’) - will lead the first wave of digital bank applications. MQ Research sees minimal short-term (ST) earnings risk to incumbents during 3-5 year ‘Foundation Phase’ due to asset cap (RM2bn). But MQ Research expects banks will lose share of day-to-day financial services (high volume, low-touch, retail) and more competition for fee-based income (e.g. insure-tech, robo-advisory). Loans competition should escalate, but later. Leaders to laggards: Maybank, CIMB, Hong Leong, RHB, Public, AmBank.

Consolidation: Time for a big-4 ecosystem?

A key long-term (LT) thematic is consolidation of the sector into a Big-4 market, as industry matures. Structural decline in asset growth, margin compression from low interest rates/competitive pressure, and costly technology investments need to be offset by scale to keep cost-to-income ratios in check. MQ Research’s bottom-up scenario analysis pins Hong Leong/RHB as top consolidator candidates; AmBank top target.

Incrementally positive 2020

An incrementally better year on:

1) commodities (CPO & oil) and fiscal-driven rebound in corporate credit demand,

2) milder net interest margin (NIM) impact from OPR cut (MQ Research trims its numbers), and

3) stable underlying asset quality beyond a few idiosyncratic corporate delinquencies.

MQ Research’s order of preference: RHB> CIMB> HLBK> MAY> PBK> AMM. In-line with preference for corporate over consumer banks; for defensives, switch from Public Bank to Hong Leong, or to Maybank for liquidity/size. Amid tepid asset growth, look out for internally driven catalysts: e.g. Maybank listing Etiqa, further DRP rollback, or M&A’s.

12-month Target Price Methodology

• CIMB MK: RM6.15 based on a Price to Book methodology
• MAY MK: RM9.00 based on a Price to Book methodology
• PBK MK: RM19.90 based on a Price to Book methodology
• RHBBANK MK: RM6.50 based on a Price to Book methodology

Source: Macquarie Research - 30 Jan 2020