Banking sector outlook bright amid renewed confidence, says finance analyst
KUCHING: Malaysia’s banking sector has gained a bright outlook moving forward amid market confidence which has been rejuvenated amid diminishing external risks and eradication of political uncertainties post the recently concluded general elections.
Cheah King Yoong, an analyst from Alliance Research Sdn Bhd ( Alliance Research) yesterday expressed fresh bullishness for the sector as he had reviewed the latter’s recommendations and adjusted the target prices of the respective banking stocks under its coverage.
He had previously imposed 10 to 20 per cent valuation discounts on the stocks premised on external uncertainties, potential loan loss provision in 2013 should the external headwinds persist and the existence of high foreign shareholdings, which would make the sector vulnerable to foreign selling should domestic equity risk premium heighten with the upcoming 13th General Election (GE13).
In view of the continued mandate given to the ruling coalition in the GE13, Cheah had removed Alliance Research’s valuation discounts as “we believe that the potential political uncertainties arising from such event is fast dissipating”.
“For now, we are maintaining our loan growth target at seven to nine per cent for this year.
“As expected, lending indicators and year to date annualised outstanding loans growth have been sluggish in the 1Q ( first quarter), mainly dragged by both lenders and borrowers turning cautious due to the election uncertainties, in our opinion.
“Although we do acknowledge that the loan growth could be dampened in the latter part of this year should the federal government decide to engage in fiscal tightening policies through subsidies rationalisation programme and raise the electricity tariff, we foresee that there are upside risks to our seven to nine per cent loan growth target.
“This is because we expect loan growth momentum to pick up going forward, mainly driven by the accelerated disbursements of ETP (Economic Transformation Programme) related loans with stabilisation of the domestic political scene,” he explained.
The analyst added that Alliance Research would review its loan growth target post 1Q financial year 2013 ( FY13) results to be released by the banks under its coverage this month.
Meanwhile, he also expected mergers and acquisitions (M&A) news flow in the banking sector to re-emerge with the stabilisation on the political front.
“Other than the recent news about Hwang DBS Bhd could potentially be acquired by AMMB Holdings Bhd and Affin Holdings Bhd, we believe that the increasingly competitive environment going forward could induce smaller domestic banks to consolidate and/or pursue further integration with their foreign strategic partners.
“We maintain that AMMB and Affin serve as good proxies for exposure to the domestic M&A theme where foreign strategic shareholders are expected to be raising their shareholdings in the domestic banks,” he stated.
He noted key downside risks to the forecast: an unexpected drying up in investment banking deal flows due to the volatility of the capital market, sharper than expected net interest margin compression due to intensifying competition and/ or overnight policy rate cut and deterioration in asset quality.
Meanwhile, RHB Research Institute Sdn Bhd (RHB Research) in another report on the sector has maintained its ‘overweight’ call on the banking sector to reflect the reduced risk premiums after the political overhang was removed.
“We think the confluence of factors such as inexpensive valuations, heavyweight sector and ample liquidity in the system mean that the sector should not be ignored especially for funds benchmarked to domestic indices,” it said yesterday.
RHB Research added that the result of Sunday’s general election had eased the risk of cancellations and changes to the terms of bigticket projects and helped remove the uncertainties that may have impacted investment spending decicions by businesses.
“With the overhang removed, we expect loan demand from the business segment to pick up and this would be positive for the banks,” it said.