DESPITE the run-up in the share price of banks, there is still a great deal of upside to a number of them. ING Financial Markets believes bank valuations are still far from their peaks.
In a report on the Malaysian banking sector dated Feb 9, ING contends that the appreciation of share prices aside, current sector valuations on price-to-book value (PBV), price-underlying profit (PUP), and price earnings ratio (PER) are still off their historical peaks.
By its reckoning, the sector's 2004 forecast annualised average PBV, PUP and PER valuations of 1.6x, 6.7x, and 14.1x, respectively, are still below the peaks of 2.7x, 8.6x and 24.4x seen over the last five years.
ING said net profit was expected to rise 15% year-on-year to RM5.75bil in banks' 2004 fiscal year “on the ongoing improvement in regional economies, which should bring about 6.9% sector loan growth.”
Its banking analyst Tay Chin Seng expects the bulk of the banking sector's net profit growth of about 15% to be mainly derived from lower provisions for non-performing loans.
“Volume should also come back in terms of loans growth, with most banks looking at growth of about 8%,” he said.
ING's top picks are Hong Leong Bank Bhd, Commerce Asset-Holding Bhd and Public Bank Bhd. Options for investors with a larger risk appetite are AMMB Holdings Bhd and RHB Capital Bhd - on the back of their higher betas.
Should the central bank amend the Banking and Financial Institutions Act, ING noted, AMMB Holdings might have to merge its bank and finance company this year, and this might result in the privatisation of the company.
As for RHB Capital, it said the three vacant chief executive positions at the bank, merchant bank and stock broking subsidiaries was reason for caution, noting that a prolonged search for new heads could have a detrimental effect on the group's earnings outlook.
ING is less bullish on Malayan Banking Bhd (Maybank), as it is unconvinced Malaysia's biggest bank deserves the premium rating it has; it does not expect the bank to outperform its smaller peers.
“Unlike its smaller rivals, Maybank has seen its competitive position eroded by its peers which have become larger after the first round of consolidation initiated by Bank Negara.
“Consequently, we believe that a return to its previous peak may not be realistic,” ING said, adding that Maybank's annualised PUP multiple of 10.1x was only marginally below the peak of 10.3x last year.
Tay picked Hong Leong Bank because compared with the other banks, its share price hasn't moved as much; it is at a “turnaround situation” owing to its new management; it is going back to the vehicle hire purchase market; and because it still has a lot of excess capital.
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