Macquarie Equities Research (MQ Research) released a report (31 Mar), expecting further short term volatility on flows and sentiment for Malaysian banks. In this report, MQ Research cautions to stay wary of upcoming events such as further rate cuts, earnings and bank/macro stats, and lowers banks’ target prices by 12% on average. Top banking stock picks are…

Sufficient buffers to weather earnings volatility

MQ Research cuts Malaysian banks’ aggregate earnings across the board for FY20/21 by -13%/-18%, factoring in the depressed economic and operating environment. MQ Research has assumed a further 50bps cut to the overnight policy rate (OPR) (-100bps for CY20) and aggregate loan growth of -1%.

However, MQ Research emphasizes that the Malaysian banks have built up sufficient capital and liquidity buffers (average common equity tier 1, CET1: 13.3%) to weather a U-shaped path to a recovery. That said, MQ Research expects further short term (ST) volatility on flows and sentiment. Notwithstanding, value has already begun to emerge, with CIMB and Public trading at sub global financial crisis (GFC) valuations. MQ Research’s order of preference is CIMB > RHB > Hong Leong > Public > Maybank > AmBank.

Risks: Asset quality could surprise on the downside

MQ Research expects asset quality will take a beating as economic conditions deteriorate. While MQ Research expects an MFRS-9 expected credit losses hit in FY20, MQ Research anticipates the bulk of the impairments could be pushed out to FY21 due to the 6-month moratorium on interest and principal repayments, which MQ Research does not see as positive as it extends the uncertainty into FY21. MQ Research’s base case assumes +18% y/y aggregate net provisions.

MQ Research sees AmBank and CIMB as the riskiest from a credit cost perspective. In addition, the collapse of oil prices (MQ Research thinks it can test $15/bbl) will put stress on banks’ O&G loan exposure. Maybank leads the pack in terms of exposure, but MQ Research sees RHB and AmBank as the most risky. Lastly, given the volatility in asset prices, exchange rates and interest rates, MQ Research sees risk to banks with high exposure to derivatives – CIMB and Maybank.

Outlook

Within Asia-Pacific, MQ Research remains equal-weighted on Malaysian Banks. While banks have enough capital and liquidity buffers in place, MQ Research notes that dividends are likely to be slashed for FY20/21 – in FY20 due to lower earnings and in FY21 to rebuild capital buffers. MQ Research sees RHB, Public and Hong Leong as the most resilient dividend distributors, while MQ Research thinks Maybank has the most downside risk.

Overall, MQ Research reiterates CIMB as its top pick on sub-GFC valuations (less downside) and substantial total shareholders return (TSR) upside of +43% to its target price with an undemanding price to book (P/B) multiple of 0.78x. RHB would be a close second choice, with a better risk profile.

MQ Research’s top defensive pick is Public, also below GFC valuations, but with limited upside (+10% TSR). MQ Research notes that depressed valuations open up merger and acquisition (M&A) potential amongst the banks, but work against corporate deals like the disposal/spin-off of insurance units. MQ Research believes there is value on a 12-month basis but are mindful of ST volatility. Key risk events are OPR cuts, quarterly earnings and weak bank stats.

Source: Macquarie Research - 1 Apr 2020