Banking - Riding on Sustained Demand

Date: 
2022-09-26
Firm: 
KENANGA
Stock: 
Price Target: 
6.35
Price Call: 
BUY
Last Price: 
5.80
Upside/Downside: 
+0.55 (9.48%)
Firm: 
KENANGA
Stock: 
Price Target: 
11.05
Price Call: 
BUY
Last Price: 
8.67
Upside/Downside: 
+2.38 (27.45%)
Firm: 
KENANGA
Stock: 
Price Target: 
4.20
Price Call: 
BUY
Last Price: 
3.80
Upside/Downside: 
+0.40 (10.53%)

We maintain our OVERWEIGHT call on the sector. Global recessionary concerns continue to press market sentiment, though we believe it open up opportunities in the banking space. Recent performance of 2QCY22 GDP (+8.9%) and Aug 2022 exports (+48% YoY) are highly supportive of growth prospects and demand for business loans. While this may taper down in 2023, we anticipate a continuing OPR up-cycle (two additional 25 bps hikes to 3.00% by 1QCY23) to cushion banking NIMs. For 4QCY22, we seek to pick names which are firmly positioned to benefit from the abovementioned boons, narrowing to those with: (i) a high growth SME-financing mix on better general economic performance, and (ii) optimal funds profile (i.e. low fixed-rate financing with high CASA mix). For the large cap banks, we highlight CIMB (OP; TP: RM6.35) which has also demonstrated defensive performance in NOII, contrary to most other banks thanks to its regional operations. MAYBANK (OP; TP: RM11.05) is still preferred for its dividend yield safety (7- 8%). For the smaller banks, we look towards ABMB (OP; TP: RM4.20) which we awarded a higher ESG rating thanks to its commendable green financing book. Fundamentally, the bank commands ROEs and dividend yields comparable to its larger cap peers.

OPR trajectory could be reaching its end. Approaching 4QCY22, we anticipate one last 25bps OPR hike in November. We do not anticipate BNM to be as aggressive as the US Fed following another 75 bps increase to the Fed Funds Rate (3.00-3.25%) in its September meeting as local inflation concerns are not as severe as abroad. While we do see gradual recovery to the supply chain and boosts to our overall economic output, developments in the Russia-Ukraine war could further press macro conditions, but we do not believe it would have as strong an impact as it did during the early days in Feb 2022.

Optimising tailwinds at hand. With the prospects at hand, we anticipate our newly revised GDP growth expectation of 6.7% to be met by a significant return in SME sector which was the most affected sector during past MCOs. Banking corporates also share similar sentiment with key loans growth strategies aimed at enabling SMEs to expand. Service sectors such as hospitality, retail and tourism are likely to be at the forefront. We identified the smaller cap banks (ABMB, AMBANK, and BIMB) to have a stronger SME identity which may solidify their position when this segment kicks off. Meanwhile, in a rising rate environment, it is more like that the banks with the greatest re-pricing power could capitalise on the introduction of higher rates. This would constitute having: (i) a low fixed rate financing mix, and/or (ii) a higher CASA-to-deposit ratio. Notably, BIMB and RHBBANK appear to have the highest variable loans rate profile while ABMB, CIMB and MAYBANK stand tall with CASA.

Maintain OVERWEIGHT on the banking sector. The investment thesis for the banking sector’s resiliency remains affirmed and we believe additional attention could be given to names which demonstrate stronger performance thanks to the factors mentioned above. On top of the industry-wide boons of: (i) progressive write-backs of Covid-19 loan provisions, and (ii) earnings-surge post prosperity tax in CY23, we feature our large cap Top Picks for 4QCY22 - CIMB (OP; TP: RM6.35) which is expected to command defensive NOII numbers as trading performances are supported by its regional arm, whereas peers are expected to still report diminishing returns. It also helps that CIMB was recently awarded a 4-star ESG rating by us for its sustainable financing efforts. MAYBANK (OP; TP: RM11.05) continues to be a favourite for dividends (7-8% yield) for those concerned with capital safety amidst ongoing uncertainties. Meanwhile, we like ABMB (OP; TP: RM4.20) amongst the small cap banks for being the leader in SME profiling as well as its considerable CASA mix. The stock’s fundamentals are also comparatively better than its larger cap peers in terms of ROE (10%) and dividend yields (6%).

Source: Kenanga Research - 26 Sept 2022

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