Local banks well grounded

PETALING JAYA: The market reiterated its bullishness on banking stocks, a day after Bank Negara assured that local banks are well-sheltered from the collapse of some financial institutions that shook the banking industry of the United States and Europe.

Hong Leong Investment Bank (HLIB) Research analyst Chan Jit Hoong said he was “glad” that the Malaysian banking system can stomach adverse shocks as shown by Bank Negara’s “extremely conservative” updated stress test.


Under the stress test, the banking system’s Common Equity Tier-1 (CET1) ratio is expected to remain above regulatory minima at 12.8%, even if the gross impaired loan ratio in 2025 rises to 7.7%.

“All in all, we see opportunity to buy banks on weakness in wake of the recent market slump, given the irrational fear-driven selldown.

“That said, we advocate to employ a more trading-oriented strategy as we believe the market will stay choppy.

“Thus, we keep our tactical overweight stance on the sector, with our ‘buy’ ratings include Public Bank Bhd, RHB Bank Bhd, AMMB Holdings Berhad, Alliance Bank Malaysia Bhd and Bank Islam Malaysia Bhd,” said Chan in a note yesterday.

On Wednesday, Bank Negara published the Financial Stability Review (FSR) for the second half of 2022, alongside its 2022 annual report and the Economic and Monetary Review 2022.

Following a briefing by Bank Negara in conjunction with the FSR, Kenanga Research analyst Clement Chua said he echoes the central bank’s confidence in the domestic financial system.

This is underpinned by the sector’s strength, resilience and overall stellar management.

“We also take comfort on Bank Negara’s statements with regards to complex asset structures and it will respect key attributes with regards to stake holder hierarchy, in the sense that the write-off in Additional Tier-1 (AT1) bonds would not be replicated here, albeit with few such products existing in our markets,” he said.

Bank Negara governor Tan Sri Nor Shamsiah Mohd Yunus had told reporters that Malaysian banks do not rely on AT1 bonds for capital, as more than 80% of banks’ capital base is made up of equities and retained earnings.

Nor Shamsiah also assured that AT1 bonds issued by Malaysian banks rank higher than equity holdings in the case of resolution.

Looking ahead, Kenanga Research’s Chua believes that the fundamentals of the banking sector is well grounded and that the sector is not likely to experience any pressures which gravitates anything close to what is happening abroad.

“That said, it is understandable if investors prefer to stay on the sideline as global sentiment for the financial sectors has tumbled,” stated Chua.

Yesterday, Bursa Malaysia’s Financial Services Index inched up marginally by 0.49%, in what appears to be reaction to Bank Negara’s assurance about the health of the banking system.

Key banking stocks such as Malayan Banking Bhd (Maybank), CIMB Group Holdings Bhd and Public Bank closed in the green, rising by 0.82%, 0.75% and 0.51%, respectively.

“While this (weak global sentiment) could present numerous buying opportunities across our coverage calls, we opine to selectively promote names which offer greater safety nets among its peers.

“We also avoid banks with a higher non-interest income exposure as investors may also view this space with greater caution,” he added.

On that note, Kenanga Research prefers banks with wider safety nets, namely Public Bank and RHB Bank.

The research house leans towards Public Bank for its its stellar asset quality and highly collateralised loans portfolio. Meanwhile, it likes RHB Bank for its leading CET1 and refreshed dividend potential of about 7% yield.

In a separate note, TA Research also reiterated its “overweight” stance on the banking sector, as the momentum in domestic economic activities remains intact, spurring demand for financing.

The research house foresees banks’ earnings in 2023 to be supported by healthy demand for loans, a pick-up in non-net interest income due to higher fee income and steadier investment income, a benign asset quality outlook and ample capital and liquidity reserves in the banking system.

“However, we also foresee potential downside risks in 2023 as uncertainty surrounding the ongoing geopolitical tensions, competition, rising inflationary pressures and rising interest rates could pose challenges for the sector.

“Other downside risks to earnings include a more severe-than-expected margin compression due to the intense deposit competition and increasing overhead costs,” it said.

Given the heightened risks related to financial stability, TA Research raised the assumption for market risk premiums for the banking sector to 6% from 5.5%.

This would result in a slight downward adjustment in valuations and target prices.

“We maintain a ‘buy’ recommendation on Public Bank, RHB Bank, AMMB, CIMB Group, Alliance Bank and Affin Bank but downgrade Maybank and Hong Leong Bank Bhd a notch to ‘hold’,” it said.

Meanwhile, RHB Research pointed out that Malaysian banks have sufficient levers in place to support earnings and dividend growth to help tide investors through a volatile period.

Maybank, CIMB and AMMB were the preferred picks of RHB Research.

“Bank Negara’s engagement session (on Wednesday) provided some high level overview and updates, but overall, held no major surprises.

“Key messages were domestic economy is resilient despite global growth uncertainties; US and Europe banking issues have minimal impact to domestic banks; and share of loans under the repayment assistance programmes continue to fall, while loan servicing remains within expectations, despite the rate hikes,” it said.

On the topic of individuals holding more than 10% equity interest in banks, RHB Research noted that Bank Negara has had conversations with the owners on ensuring that proper succession planning is in place.

“Specifically, in the case of Public Bank, Bank Negara said it remains to be seen how the estate distributes the shares,” it said.

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