After zigzagging throughout 2H21, KLFIN is poise to end on a fairly flat note. In 1H22, we expect decent operational outlook and FY22 sector core profit is seen to grow 11% (FY21: +27%) primarily from lower NCC. Also, OPR hike will benefit banks and we believe the market has passably priced in credit risk. In our view, the sector’s risk-reward profile remains skewed favourably to the upside. Retain OVERWEIGHT; BUY calls include: Maybank, Public, RHB, Alliance, BIMB, Affin.
Zigzag but to finish flat. Like 1H21, KLFIN is poise to finish 2H21 on a flat note after going through a roller coaster ride. Despite various headwinds stemming from Covid- 19 pandemic, interest on banking stocks remained fairly keen. On a relative basis, we note Alliance (+24%) was the best performer given its faster-than-anticipated upward normalization in dividend payout while Affin (-5%) was the weakest due to the lack of investors’ affinity towards smaller banks.
Decent 2022 operational outlook. Following the 3 good quarters in 2021, we expect 4Q21 to see a minor blip but should improve in 1H22 given: (i) steady NIM, (ii) better macro environment, (iii) strict cost discipline, and (iv) lower impaired loan allowances. Overall, FY22 sector core net profit is projected to grow 11% from 27% in FY21. Also, sector ROE is seen widening to 9% (+50bp); if we include the one-time Prosperity Tax impact, growth rate would be smaller at 0-1% while ROE will settle at 8.4% instead.
OPR hike in 2H22. The local economic recovery is seen to be flimsy at the beginning and will take some time before turning more entrenched. Hence, we expect BNM will maintain the OPR at a low 1.75% in 1H22 to help spur economic activities and look to only raise it in 2H22 (i.e. 4Q). In turn, this will benefit banks; we estimate every 25bp OPR hike would broaden sector NIM by 5-6bp and lift profit forecast by 4-5% (biggest gainers: Alliance, BIMB; smaller gainers: Affin, Public).
Sufficient loss coverage. Although 6.8% of system loans are deemed to be of higher credit risk and is above BNM’s earlier stress test GIL ratio of 5.4%, in our view, banks have made decent pre-emptive bad loan allowances (loss coverage for riskier Covid- 19-related loans is 8x more than the level for good loans) and it has been adequately priced in by the market (FY22-23 NCC is 5-17bp higher vs pre-pandemic level and for FY21-22, it has similar LGD to Stage 3 impaired loans). Also, the heavy pre-emptive provisioning carried out by banks over the past 2 years has not been utilized.
Undemanding price points. The sector is still trading close to -1.0SD to both its 5- year and 10-year average P/B (at 1.0x). Also, it is beneath the GFC bottom of 1.14x. Recall, back during the GFC recovery phase, it rallied 3SD notches and peak at +2SD above its 10-year mean P/B. However, we reckon it should now trade closer to its 5- year mean P/B i.e. at pre-pandemic valuations. On a more bullish scenario, the sector may rally to +1SD P/B on a 5-year basis, if it mimics GFC’s valuation recovery trend.
Maintain OVERWEIGHT. We believe the sector’s risk-reward profile is skewed to the upside as most negatives would have been considered by the market. In our opinion, Covid-19 woes will likely fizzle out in 2022 while the state of the economy and banking sector will only get better in time. As such, we are bullish and employ a rather broad stock buying strategy in 1H22. For large-sized banks, we like Maybank (TP: RM9.40) for its strong yield and Public (TP: RM4.50) for its resilient asset quality. For mid -sized banks, RHB (TP: RM7.00) is favoured for its high CET1 ratio and attractive price-tag. For small-sized banks, all 3 under our coverage are Buy calls for different reasons: (i) BIMB (TP: RM3.45) for its positive structural growth drivers, (ii) Alliance (TP: RM3.30) is likened for its quicker-than-expected upward normalizing dividend payout, (iii) Affin (TP: RM2.25) for its potential asset management arm value unlocking exercise.
Source: Hong Leong Investment Bank Research - 20 Dec 2021