Banking sector faces risk of further correction

Valuation has yet to reach its record low level

PETALING JAYA: Despite a recent decline, the valuation for the local banking sector has yet to reach its record low level, indicating that there could be risk of further correction.

In its analysis, Affin Hwang Capital Research noted that the banking sector was now trading at an estimated 1.3 times price-tobook-value (P/BV) and 12 times price-to-earnings (P/E) on a oneyear forward basis. This compared with the sector’s all-time low of 1.13 times P/BV and 8.9 times P/E in 2009.

The current inexpensive valuation of the sector was mainly attributable to the significant decline in the share prices of several large banking stocks such as Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd.

According to Affin Hwang Capital Research, sentiment towards local banking stocks in general had turned sour in the last one month, as investors were spooked by potential resignations of CEOs of government-linked companies (GLCs) affecting the industry.

This came amid a widespread shake-up at GLCs after the Pakatan Harapan coalition swept into power, replacing the six-decade-old Barisan Nasional, following its win in the 14th general election (GE14) on May 9.

Among other things, the new government led by Prime Minister Tun Dr Mahathir Mohamad has pledged to do a clean-up of GLCs, reviewing its role and removing political appointees heading those corporations.

Affin Hwang Capital Research, however, reckoned that investor reaction to potential changes at GLCs was a short-term effect.

“We believe that investor reac- tion to news of potential resignations of CEOs of GLCs may be temporary, and we expect share price recovery once there is more certainty with regards to news flows,” the brokerage explained in its report yesterday.

“At this juncture, we think earnings risk will be the biggest threat to our price targets (for banking stocks under our coverage),” it added.

Post-GE14, Maybank and CIMB’s shares were the biggest losers in the industry, shedding 16.2% and 21.7%, respectively, to close at RM8.68 and RM5.40 yesterday.

Maybank’s shares are currently valued at around 1.3 times P/BV, while CIMB’s shares are valued at 1.01 times P/BV.

Drawing from historical price multiples, Maybank’s share price dipped to a P/BV multiple as low as 0.9 times in February 2009, while CIMB’s share price dipped to as low as 0.78 times in January 2016, Affin Hwang Capital Research said.

It noted that other financial stocks which saw a recent pullback included Alliance, Hong Leong Bank and non-bank Aeon Credit Service (M) Bhd, but given their strong fundamentals, this could present a buying opportunity.

As for Public Bank Bhd, the brokerage said, the bank’s high foreign shareholding of 39.1% (as at endMay 2018) could present a downside risk to the share price. Public Bank is now traded at 2.38 times P/ BV compared with its low of two times P/BV between October 2015 and November 2017.

Meanwhile, Affin Hwang Capital Research said the prolonged low valuations for some banks could potentially trigger mergers and acquisitions (M&As).

“Should valuations stay low for certain banks, that is, with P/BV multiples at below one times, we are of the view that industry M&A activities could emerge, driven by the larger-sized banks with more robust return-to-equity levels,” it said.

At present, banks with valuations of less than one times P/BV, based on the brokerage’s estimates, are AMMB Holdings Bhd, RHB Bank Bhd and Affin Bank Bhd.

Affin Hwang Capital Research said an M&A would be a rerating catalyst for the industry.

Overall, the brokerage has maintained its “overweight” call on the banking sector.

“In our view, fundamentals of Malaysian banks remain long-run positive, even though there could be changes at the top,” Affin Hwang Capital Research noted.

Its top picks for the sector are Maybank and Aeon Credit.

It liked Maybank for its aggressive nature, with a stable fundbased income and net interest margin operationally, while Aeon Credit was favoured for its positive outlook driven by firmer receivable yields and value-chain transformation initiatives.