PETALING JAYA: The fall of the financial index (KFIN) since early June is set to present a good buying opportunity for the local banking sector.
The sector is forecast to post strong earnings in the second half of the year (2H), on the back of higher net interest margins (NIM) with Bank Negara expected to normalise interest rates as the economy gains further traction.
Hong Leong Investment Bank Research (HLIB Research) noted that the recent price correction offers a good opportunity to accumulate on weakness, as the sector is forecast to deliver back-to-back profit growth.
Additionally, the return on equity for 2023 is projected to recover to 9.7%, similar to 2018 levels when the sector was trading at a higher valuation of 1.30 times its price-to-book value versus 0.89 times now.
“This implies undervaluation. We have not baked in any preemptive provisioning write backs into our estimates, suggesting upside risk.
“In addition, the sector offers a fairly attractive dividend yield of 4.8%,” HLIB Research said in a report yesterday.
The KFIN fell from a high of 16,910 points on May 31 to a low of 15,878 points on June 6, in line with the broader market weakness as it suffered the effects of contagion from the sell-off on major global markets.
HLIB Research also expects investor appetite for the banking sector to return in an interest-rate upcycle that favours value stocks over growth stocks.
The research outfit advised a selective buying strategy in 2H with a focus on high dividend yield, attractive valuation or sector laggards.
It recommends Malayan Banking Bhd for its strong dividend yield and has a target price (TP) of RM9.70 on the country’s largest banking group.
The research house likes RHB Bank Bhd for its strong capitalisation with its high CET1 ratio and attractive price tag.
HLIB Research has a target price of RM7 a share on RHB.
With the sector’s risk-reward profile skewed to the upside from the combination of robust profit growth and undemanding valuations, it also recommends that investors consider small-sized banks like Bank Islam Malaysia Bhd for its structural growth drivers and laggard share price response (TP: RM3.30).
It also likes Affin Bank Bhd (TP: RM2.35) for its strong financial metrics and potential offer of a special dividend, following the sale of its stakes in asset management and insurance businesses.
HLIB Research expects the banking sector’s 2022 sector profit to expand 3.7% on broader NIM and lower net credit cost.
It noted that a further hike in the overnight policy rate (OPR) by Bank Negara will benefit banks following the 25-basis-point rise in May.
The sector has scope for preemptive provision write backs along with better loan growth and fee income, which should help overcome challenges from choppy treasury market conditions, inflationary pressures and the imposition of the Prosperity Tax.