Banking sector seeing more optimistic sentiment
Economy’s re-opening main driver for stocks
PETALING JAYA: Despite persistent earnings challenges, the banking sector is seeing a more optimistic sentiment, says UOB Kay Hian Research.
The brokerage noted that the economy’s re-opening theme is the main driver of the positive investor sentiment towards banking stocks.
“Sentiment on cyclical sectors, including banks, has started to turn more positive as the market is starting to price in opening of the economy on the back of positive Covid-19 containment trends.
“While the sector could still ride on nearterm momentum on the reopening of the economy, we believe there should be a fair degree of consolidation ahead amid weak economic recovery and lag effect of gross-impaired-loan (GIL) formation due to the loan moratorium,” it said in a report.
UOB Kay Hian retained its “market weight” rating on the banking sector, pointing out that return-on-equity (ROE) would likely remain suppressed into 2021.
“The sector is trading at 0.87 time the estimated price-to-book (P/B) value for 2021, which is only slightly below the 2008/09 global financial crisis (GFC) low of 0.95 time, and broadly correlates to our current 2021 sector ROE forecast of 7.5%,” it said.
“Taking a balanced approach by acknowledging that the ample liquidity could continue to support valuations at above fundamentals while noting that asset quality is likely to deteriorate significantly over the next 12 months, we are maintaining our ‘market weight’ recommendation but reducing our risk premium on banks that we believe could outperform in the current environment,” it added.
Its top pick is RHB Bank Bhd, which it had upgraded to “buy”, with a target price of RM6.04, on its robust Common Equity Tier 1 (CET1) and hence its ability to sustain above-industry dividend payouts.
UOB Kay Hian also advocated a tactical buy for Public Bank Bhd at close to RM16 level, which would imply a dividend yield of 4.4%, given its strong provision buffer and low credit-cost risk.
As for CIMB Group Holdings Bhd, the brokerage said the company’s stock could also be deemed a high-beta laggard but earnings quality remained questionable.
Overall, from its analysis, UOB Kay Hian had shortlisted Public Bank, RHB Bank and Alliance Bank Malaysia Bhd as companies that could outperform in an environment where asset quality would likely to deteriorate significantly, given the unprecedented nature of the Covid-19 pandemic.
Its analysis was based on the following parameters: loan-loss-coverage ratio inclusive of regulatory reserves exceeding 100%; CET1 ratio of more than 13%; projected 2021 implied dividend yield of more than 4%; and current P/B at close to the GFC low.
Public Bank, RHB Bank and Alliance Bank met the above criteria, while Hong Leong Bank Bhd (HLB) and BIMB Holdings Bhd met all but just one parameter.
The brokerage said for HLB, its dividend yields were still unattractive at below current peers’ current average of 4.4%, while BIMB continued to trade above its GFC P/B low, its current ROE was higher than its GFC level.
For Alliance Bank, UOB Kay Hian remained mindful of the bank’s high SME exposure despite making into the brokerage’s shortlist.