Improved risk-reward profile for banking stocks

PETALING JAYA: Concerns over the possible contagion effects from the Silicon Valley Bank (SVB) fallout have seen investors selling banking shares in many markets, including Malaysia.

Following the recent sell-off, research firms such as Hong Leong Investment Bank (HLIB) Research are now turning bullish on local banks again.

“In our view, the market has broadly baked in negative headwinds into forward expectations, which thus, reduce the odds of downside surprises and tip the sector’s risk-to-reward profile to be more favourable,” HLIB Research said in a report yesterday.

Furthermore, the research firm believes the prominence of financial year 2023 (FY23) net interest margin (NIM) slippage may be smaller than initially feared, while asset quality risk remains tame.

HLIB Research added that it does not foresee Malaysian banks suffering from the same fate as SVB and advocates that investors “employ a more trading-oriented strategy as we believe the market will stay choppy”.

Following the recent sell-off, it has tactically upgraded the sector to “overweight” and raised Public Bank Bhd shares to a “buy”.

Its other “buy” ratings include RHB Bank Bhd, AMMB Holdings Bhd, Alliance Bank Malaysia Bhd and BIMB Holdings Bhd.

HLIB Research noted the performance of the KL Finance Index has been dull since the firm’s sector downgrade in early December 2022.

This was due to several factors, one being expectations of fewer overnight policy rate hikes in 2023 and the higher cost of funds, which could lead to NIM slippage.

There were also concerns over weaker loan growth and subdued treasury income performance, along with insufficient loan loss cover in the event of a sharp asset quality deterioration.

However, seeing that banks’ share prices have pulled back, the research firm said it has tactically turned bullish on the sector again.

Although NIM compression would not be as prominent as initially feared, HLIB Research thinks that Bank Negara may potentially raise the statutory reserve requirement (SRR) ratio, which currently stands at 2%. The pre-pandemic level was 3.5%.

“Based on our calculations, every 50-basis-point SRR increase and assuming a 4% interest yield forgone, would shave banks’ earnings by only 1%,” added HLIB Research.

The research firm said it was also not overly worried about the gross impaired loan ratio inching up, as it believes banks are better equipped (versus prior slumps) due to the large pre-emptive allowances built up in FY20-FY22 to fight Covid-19 pandemic woes.

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