SELECT banking stocks with good asset quality and good dividend yield are expected to remain on investors' buying lists despite the current weak market conditions.
Although banking stocks may not offer investors the best shield compared with some other sectors such as consumer and media, analysts believe banks' prospects remain strong given their proven record during difficult times. In addition, they have been consistently good dividend paymasters.
Just earlier this month, Goldman Sachs said in a report that Malaysian banks were worth another look in view of the higher systemic risk in South Korea and the negative impact the Severe Acute Respiratory Syndrome (SARS) outbreak had on Hong Kong.
Goldman believed that Malaysian banks, especially Public Bank and Maybank, offered a relatively safe investment, given the still resilient Malaysian economy, rising private investment, and potential primers such as the RM10bil Valuecap fund and the government's soon-to-be-announced economic package.
Another positive is Bank Negaras recent announcement that interest rates will remain unchanged, which means that banks will not be subject to artificial margin pressure.
Also, contrary to market speculation, the US-based global investment house said it believed the government retained ample ammunition to pump-prime the economy, given Malaysias sizeable current account surplus; the ample liquidity in the system, where it has up to RM70bil in sterilised debt or 18% of 2003 estimated GDP; low debt-to-service ratio of 14%. It also has easy access to international capital markets given its low short-term debt-to-forex reserve ratio of 23% in 2002.
Nonetheless, Goldman recom-mended a defensive strategy to counter volatile markets.
We continue to advocate a defensive strategy that offers optionalities given the current market volatility.
We view Public Bank and Maybank stocks as resilient, considering their combination of good fundamentals, core operational out-performance, and potential to increase dividend yields, Goldman Sachs said.
KLCS Asset Management executive director Connie Ong said she was maintaining a selective buy on banking stocks, noting that after the recent share price pullback, many banking stocks were now reasonably priced.
Valuations look attractive as the current share prices have already taken into account concerns of the slowing economy, as well as slower loans growth.
She added that banking stocks were currently trading at a price to earnings (PE) ratio of 10 to 12 times, while share prices in general were trading at 1.1 to 1.3 times book value. This compared favourably with a PE of 20 times and price to book ratio of at least 1.5 times previously.
Meanwhile, GK Goh Research said given a low loan growth environment, investors should go for Public Bank and Maybank for yield surprises.
Hong Leong Bank Bhd also looks like it could surprise with a higher dividend, but uncertainty over its bumiputra issue and falling return on equity keeps it on hold.
Commerce Asset-Holding Bhd (CAHB) is also likely to return more capital to shareholders, but via buybacks rather than dividend, it said.
Another analyst said the impact of SARS on Malaysian banks was likely to be minimal compared with their peers in Hong Kong or Singapore.
Of course, if the SARS outbreak is prolonged, all sectors of the economy will be hurt.
In such a scenario, banks will also be adversely impacted as this will result in slower loans growth, and worst, possible rising in non-performing loans.
But the general consensus so far is that the outbreak should be contained in the next three months.
Already, the World Health Organisation has said that the virus has been contained in some parts of the world, the analyst said.
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