CGS-CIMB Research upgrades banks to OW, valuations attractive

  • Analyst Reports
  • Sunday, 20 Sep 2020

“Our stock picks for the sector are Public Bank and Hong Leong Bank (strong asset qualities), RHB (higher fee income growth), and AMMB (attractive valuation), ” CGS-CIMB Research said.

KUALA LUMPUR: CGC-CIMB Equities Research upgrades Malaysian banks from Neutral to Overweight as it expects net profit growth to recover in 2021F to 14.7% (vs. -18.7% in 2020F).

It said that banks’ valuations are attractive, at CY21F P/E of 10.5 times and CY20F price-to-book value (P/BV) of one time (all-time low).

“Our stock picks for the sector are Public Bank and Hong Leong Bank (strong asset qualities), RHB (higher fee income growth), and AMMB (attractive valuation), ” it said.

To recap, CGS-CIMB Research raised its rating for banks as it believes the market has priced in most of the bad news affecting banks’ earnings in 2020F.

“This is reflected in the YTD underperformance of the KL Finance index against KLCI of 15%. The CY21F P/E valuation for banks is attractive at only 10.5 times, the lowest since Feb 2013.

“We think that banks’ reported net profit may have bottomed in 2Q20 and hence set to recover in 2H20F.

“We project banks’ net profit to grow 14.7% in 2021F vs. -18.7% in 2020, to be driven by the following: (1) bottoming of the overnight policy rate (OPR) which would lead to a stabilisation of net interest margin (NIM), (2) declining loan loss provisioning (LLP) in 2021F as provisions due to Covd-19 would have been mostly captured in 2020F, and (3) a recovery in loan growth driven by 7.5% GDP growth in 2021F, ” it said.

CGS-CIMB Research said the downside risk for banks is limited as the sector is trading at CY20F P/BV of only one time, which is an all-time low since it first compiled the information in 2000), and offers dividend yield of 4.8% for CY21F.

It said in 2020, Malaysian banks’ earnings are being dented by modification loss (ML) arising from the loan moratorium offered for fixed-rate loans, lower NIM due to the 125bp cut in OPR, and higher LLP due to hefty pre-emptive provisioning for Covid-19, arising from 4% contraction in 2020F GDP.

“We expect the banks we cover to post a 14.7% increase in 2021F net profit vs. an 18.7% drop in 2020F.

“The key earnings drivers in 2021F are (1) a 3.7% increase in net interest income (vs. a decline of 6.7% in 2020F) and (2) a 23.4% drop in LLP (vs. an increase of 86.9% in 2020F). We also expect banks’ dividend yield to rise from 3.2% in 2020F to 4.8% in 2021F, ” it said.

It also said banks were trading at attractive valuations and this suggests that the market has priced in the concerns over earnings risks but yet to fully appreciate the projected earnings recovery in 2021F as Malaysia recovers from the Covid-19 outbreak.

Other catalysts that could boost banks' earnings are stronger loan growth, sooner-than-expected hike in OPR, lower-than-expected provisioning due to stronger-than-expected economic recovery, and subsiding political risks.

“We believe that big-capped banks with strong asset qualities are likely to lead the re-rating of the banking sector as investors rotate into sectors deemed likely to benefit from projected economic recovery in 2021F.

“We continue to like Public Bank, RHB Bank and AMMB Holdings for exposure to the sector, and upgraded Hong Leong Bank from Hold to Add in line with our positive view on the sector's earnings prospects.

“We like Public Bank and Hong Leong Bank for their strong asset qualities, RHB for the fee-income driver from new bancatakaful agreement, and AMMB for attractive valuations (CY21F P/E of 6.4 times), ” it said.

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