KUALA LUMPUR: CIMB Research has maintained its “overweight” on the banking sector as it expect recovery in earnings per share (EPS) growth in 2017 and has “add” calls on five Malaysian banks.
“We continue to ‘overweight’ Malaysian banks, premised on potential re-rating catalysts of undemanding valuations for some banks as most banks are trading close to their five-year average, expected recovery in EPS growth in 2017, and enticing 2017 forecast dividend yield of 4.3% versus 3.2% for the market,” the research house said in a report.
CIMB said it preferred RHB Bank, AMMB Holdings
and Affin for value plays as their CY17F price-earnings (P/E) ratio are the lowest in the sector. Their CY17F P/Es – 10.5 times for RHB Bank, 10.3 times for AMMB and 9.9 times for Affin – are also below the sector’s average of 12.2 times.
“Among big-cap banks, our choice is Maybank as we forecast a recovery in its net profit growth from a decline of 1.4% in FY16 to an expansion of 8% in FY17, underpinned by the normalisation of its credit costs. Maybank proactively built up its rescheduled and restructured loans in 2016,” it said, adding that any write-backs from some of these R&R loans would partly offset additional provisioning from new impaired loans.
CIMB said BIMB Holdings
was tagged as an “add” in its book as among the Malaysian banks, it was the only beneficiary of the implementation of EPF’s Simpanan Shariah scheme in 2017 which would increase the demand for Shariah-compliant stocks. BIMB is the only bank on the list of Shariah-compliant stocks in Malaysia.
“We also like BIMB for its swift loan growth (14.1% in 2016) unrivalled by its peers, and solid asset quality with the highest loan loss coverage in the sector,” it said.
Meanwhile, the research house expect the loan loss coverage (LLC) of most banks to be stable or slightly higher in 2017, unless certain banks were hit by the defaults of big corporate loans.
“The coverage ratio (inclusive of RR) would be higher in 2017 as banks will set aside more RR in anticipation of the adoption of MFRS 9 in 2018,” it said.
The banking industry had a comfortable LLC ratio of 91.5% at end Dec 2016. BIMB’s LLC ratio was the highest at 175.4% among the listed banking groups.
Conversely, the ratios for Affin and RHB Bank were the lowest at 55% and 56.9%, respectively, raising market concern that they may not have adequate coverage for their impaired loans.
CIMB said inclusive of regulatory reserve (RR), the coverage ratios for Affin and RHB would rise to 93.6% and 74.7%, respective, at end-Dec 2016.
RR is one of the reserves that Bank Negara requires banks to provide for their loans (minimum requirement of 1.2% of their total loans for RR plus CA).
“We view these levels as reasonable and hence do not foresee an urgent need for them to bring up their ratios to the sector’s average of 98%,” it added.
“We estimate the collateral coverage ratio (value of collateral over the total loans) for all banks to be at 30-40%. Adding this to the coverage ratios would raise the ratios of all banks to above 100%,” CIMB said.