We  view  the  recent  sharp  selloff  in  Asean  banking  stocks  as  an opportunity to accumulate on weakness, as the growth outlook relative to  developed  nations’  remains  compelling.  The  sector’s  liquidity  and NPL  outlook  is  intact  owing  to  resilient  domestic  consumption  and investment  growth.  Our  top  country  banking  picks  are  Thailand  and Malaysia, while we remain NEUTRAL on Indonesia and Singapore. 

-  Risk-off  strikes  again.  Asean  banking  stocks  suffered  a  sharp  sell-down  over  the  past  month  in  tandem  with  regional  risk-off  trades  in emerging capital markets. Not surprisingly, the less developed emerging economies  of  Thailand,  Indonesia  and  the  Philippines  bore the  brunt  of the  sell-down,  seeing  their  respective  banking  indices  declining  15.9%, 12.9%  and  9.7%  over  the  past  month.  In  contrast,  Malaysia’s  banking index chalked up a 1.5% gain over the  same period. As proxies to their economies, banks have been spooked by fears that monetary tightening may  result  in  a  moderating  macroeconomic  growth  and  higher  NPLs, and in turn credit costs normalizing upwards. On the contrary, a number of central banks - The Bank of Thailand, Reserve Bank of Australia and Bank  of  Korea  -  have  instead  cut  interest  rates,  bearing  in  mind  the potential  pitfalls  in  the  current  global  economic  recovery.  This,  coupled with the healthy build up of loans loss  reserves in many Asean banking markets, significantly reduces the risk of any spike in credit costs.  

- Sector  still  in  good  shape.  Apart  from  concerns  of  persistent  net interest  margin  (NIM)  pressure,  the  current  macro  environment  is  still conducive  for  a  sustainable  and  stable  growth  outlook.  Regional fundamentals are underpinned by: i) resilient domestic consumption and investment  growth,  ii)  sufficiently  stable  domestic  retail  and  wholesale liquidity  despite  the  loans  to  deposit  ratio  (LDR)  having  risen  over  the past  three  years,  iii)  asset  quality  remains  robust,  iv)  unemployment rates are well-contained, and v) inflation being kept in check, prompting interest rate cuts in markets like Thailand.  

-  Profiting from depressed valuations and compelling growth. Among the  four  Asean  banking  markets  under  our  coverage,  we  like  Thailand and Malaysia for their compelling growth to valuation metrics. We expect these  two  countries  to  generate  the  strongest  sector  pre-provision operating  profit  (PPOP)  growth  of  14.5%  and  14.4%  respectively.  For Indonesia,  on  which  we  are  NEUTRAL,  we  like  large  and  liquid  banks such  as  BBRI  and  BBCA  over  their  smaller  peers  for  their  edge  in pricing power and liquidity.

Source: RHB