Banks outlook in 2H18: Bright or bleak?
Investors are keen on gauging the overall health of the local financial sector, specifically assessing if the recent shares selloff presents investors with a good buying opportunity.
It has been a steady quarter for banks in Malaysia – domestic loan growth in the first quarter of 2018 (1Q18) of most banks was above the industry rate, although dampened by the slower pace of overseas loans.
Foreign exchange ( forex) translation with the strengthening of the ringgit also affected the growth of international loans.
According to Affin Hwang Investment Bank Bhd (Affin Hwang Capital) in a sector overview last week, stocks in its banking universe mostly saw a reversal in fortune over the past three months while succumbing to volatility in share prices.
It said the banking sector faces risk of further correction – despite a recent decline, the valuation for the local banking sector has yet to reach its record low level.
This indicates that there could be risk of further correction.
In an analysis, AffinHwang Capital noted that the banking sector was now trading at an estimated 1.3 times price-to-book-value (P/BV) and 12 times priceto-earnings (P/E) on a one-year forward basis.
This is compared to 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.
According to AffinHwang Capital, 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.
AffinHwang Capital was of the opinion that investor reaction to potential changes at GLCs was only a short-term effect.
“We believe that investor reaction 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,” it opined in the report.
“At this juncture, we think earnings risk will be the biggest threat to our price targets (for banking stocks under our coverage),” it added.
“Based on our estimates, the sector is now trading at a 1.3 times its price to bool value (PBV) multiples and a 12 times its price to earnings ratio (PE ratio) at 10-year mean, based on a 1-year forward basis.
“Compared to the lows of 2009, sector PBV touched 1.13 times while PE touched 8.9 times.
“At this juncture, we think earnings risk will be the biggest threat to our price targets.
“Otherwise, we believe that investors’ reaction to news of potential resignations of CEOs of government-linked companies (GLCs) may be temporary and we expect share price-recovery once there is more certainty with regards to news flows.
Going into specifics, the research firm saw that share prices of Malayan Banking Bhd (Maybank), CIMB Group Holdings Bhd (CIMB) and Public Bank Bhd (Public Bank) saw the largest stock price correction in the last month.
Other financial stocks which saw recent pullback include Alliance Bank Bhd, Hong Leong Bank and non-bank Aeon Credit Services Bhd, but given their strong fundamentals, the research firm believed his presents a buying opportunity for their shares.
“Should valuations stay low for certain banks -- such as with a PBV multiple at below one times -- we are of the view that industry mergers an acquisition (M&A) activities could emerge, driven by the larger-sized banks with more robust return on equity (ROE) levels,” it advised.
The sector is currently trading at a 2018 estimated P/BV multiple of 1.3 times versus the past-10-year average of 1.47 times.
Kick-off the year with robust fundamentals
FundSupermart analyst Jerry Lee observed robust fundamentals since its first call on the Malaysia banking sector early this year, posting a rather respectable return of 4.6 per cent on a yearto-date basis.
It outperformed the broad index, FBM KLCI index by 6.8 per cent.
“In fact, prior to the 14th General Elections, the Financial sector delivered an even outstanding return year to date of about 8.9 per cent,” Lee said in his overview of the industry.
“However, given the increasing political and policy uncertainty amid the unexpected GE-14 results – a change in new government for the first time in 61 years, Malaysia equity market witnessed significant foreign outflow since a week before the GE14.
“As a result, the Financial sector which has previously benefited from the strong foreign inflow experienced inescapable intense selling pressure, posting 4.8 per cent of losses over the past onemonth period.”
Lee said quite a number of banks maintained strong earnings momentum over the first quarter of 2018 with an average earnings growth of about 10 per cent year on year (y-o-y).
Insignificant Impact from MFRS 9
Generally, the impact of the new accounting standard, MFRS 9 on bank capital was insignificant.
In fact, on average, the actual impact of about 40bps and 20bps reduction in banks’ Common Equity Tier 1 ratio and Total Capital was much lower than the consensus estimates of about 50bps to 80bps reduction.
On top of that, after the reduction in the capital ratio since the implementation of new accounting standard, these ratios for Malaysia’s Banks continue to stand comfortably above the minimum regulatory capital adequacy requirements for CET1 and Total Capital of 4.5% and 8.0%.
In addition, the credible rating agency, Moody’s Investors Service mentioned that the adoption of the new accounting standard is largely credit neutral on Malaysian Banks as they expect that the underlying economics of bank asset will remain unchanged.
All in all, after assessing the 1Q 2018 financial results, the impact of MFRS 9 was manageable for the Malaysian Banks and not as bad as what was predicted earlier.