AmInvest Research's Buy call on RHB Bank is premised on the stock's undemanding valuation, improvement in the outlook of its non-interest income from stronger capital market activities as well as lower provisions
KUALA LUMPUR: AmInvestment Bank Research is maintaining its Overweight stance on the banking sector.
It said on Friday its stock picks are RHB Bank (fair value: RM6 a share), Public Bank (fair value: RM22.30) and Hong Leong Bank (fair value: RM15.20).
“Our Buy call on RHB Bank is premised on the stock's undemanding valuation, improvement in the outlook of its non-interest income from stronger capital market activities as well as lower provisions.
“On Public Bank, it is based on its strong asset quality and high level of regulatory reserves which will be beneficial to offset against the higher provisions under MFRS 9 if allowed by the regulatory authority.
“Meanwhile, for Hong Leong Bank, we like the stock due to its strong asset quality, improving earnings contribution from its associate, Bank of Chengdu after the heavy provisioning earlier and commendable improvement in net interest margin (NIM) with disciplined loan pricing and active management of funding cost,” it said.
AmInvestment Research projects the sector's core earnings to grow by 8.6% on-year in 2017 from a flat earnings growth in 2016.
“The improvement in earnings is anticipated to be driven by higher non-interest income from a stronger capital market and lower provisions for loan losses.
“The improvement in capital market activities will bode well for non-interest income of banks. We anticipate a gradual improvement in provisions of banks as external economic conditions are expected to turn better progressively,” it said.
The research house maintained its loan growth expectation for the industry of 5.0%-6.0% for 2017.
Underpinning the growth outlook would be a modest growth in retail loans especially in mortgage loans for affordable homes and improvement in business loans from infrastructure, higher exports and firmer commodity prices.
“Our loan growth projection is on the back on a domestic GDP expansion of 5.0% for 2017. This will translate into a loan-to-GDP multiplier of between 1.0 times and 1.2 times.
“We are seeing improvement in the demand for business loans. Domestically, business loans have picked up pace in March and April 2017, and this is positive on the industry's loans,” it said.
Most banks reported better net interest margins (NIMs) in 1Q2017, mainly from management of liquidity and due to lower funding cost.
Nevertheless, competition for deposits is likely to remain keen in 2H2017. In 2H2017, AmInvestment Research continues to expect a mild pressure on banks' NIM, as banks are still offering higher rates for longer-term deposits in preparation for the implementation of net stable funding ratio requirement in 2018.
“For 2017, we project a lower NIM contraction of 3bps in 2017 compared to 4bps in 2016,” it said.
AmInvestment Research’s view is that liquidity for the sector is expected to gradually improve as seen from the recent stronger deposit growth in the sector with an improvement in momentum for business deposits.
Also, banks are doing well in regards to current account/ savings account (CASA) growth with CASA ratios continuing to trend higher. All these are anticipated to lead to a more stable NIM for banks in 2018.
“For 2H2017, we maintain our view that the asset yield of banks is expected to remain stable as the overnight policy rate (OPR) is likely to be maintained at 3.00%. Our house view is that the OPR is most likely to stay unchanged with only a modest chance of an increase of 25bps in 4Q2017 as a result of negative returns due to the inflation growth,” it said.
Currently, there are some upticks in the gross impaired-loan (GIL) ratio for banks in 1Q2017, coming from a mixture of business and retail loan portfolio.
Nevertheless, on an overall basis, the asset quality of the domestic loans is still considered to be stable with a GIL ratio of 1.7%.
“We expect this to be sustained moving into 2H2017. For the overseas operations of banks, we expect a gradual improvement in asset quality. We project a lower credit cost of 0.30% for the sector in 2017 compared to 0.36% in 2016. Moving into 2018, we forecast a further improvement in the sector's credit cost to 0.28%.
“In 2H2017, we expect banks to provide more guidance on the impact of the implementation of MFRS 9. As highlighted in our earlier note, on day 1 of the implementation of the new accounting standard, any increase in provisions from MFRS 9 will be charged directly to banks' shareholders' funds, possibly with some impact on banks' CET1 ratios,” it said.
AmInvestment Research said the yield of bonds has been trending lower with purchases supported by institutional investors.
It viewed this as positive on the interest cost of banks with potentially positive impact from marked-to-market gains on investment securities.
For 2017, it expects the sector’s return on equity (ROE) to trend lower to 10.7% from 11.1% in 2016 and 12.0% in 2015. Thereafter, in 2018 and 2019, it anticipates the sector's ROE to stabilise between 10.0% and 11.0%.
“To sum up, our overweight stance on the sector is premised on: 1) a positive momentum for loan growth with business loans improving; 2) stable asset quality trend for domestic loans while that for overseas operations is improving; 3) signs of better outlook for capital market activities; 4) ROE of banks to be more stable ahead, between 10.0% and 11.0%; and 5) gradual improvement in provisions and earnings of banks moving forward as external economic conditions are expected to turn better progressively,” it said.
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