MIDF Research said in its report on the banking sector that “valuations are too good to ignore”.
PETALING JAYA: Despite the challenging operating environment, the banking sector remains appealing for investors, thanks to its attractive valuation.
This followed the recent sell-down of banking stocks, which opens up some decent upside potential for these counters.
MIDF Research, for one, said in its report on the banking sector that the “valuations are too good to ignore”.
Maintaining its “positive” call on the sector, the brokerage noted banks’ asset quality in general remained broadly manageable, and this should support heavy writebacks in the second half of 2023.
“However, we will be looking at residential mortgages and personal financing closely,” MIDF Research said about asset quality.
It noted that deposit competition had cooled off ahead of the May 2023 overnight policy rate (OPR) hike.
“Banks have mixed views, but generally agree that deposit competition is improving; expect it to persist in certain brackets, especially in the lower duration ones,” MIDF Research said.
“Liquidity coverage ratios are reduced across the banks. Banks have lowered their liquidity build, in line with the intention to combat net interest margin (NIM) compression – the scope of which will depend on the banks’ comfortable liquidity levels,” it added.
According to MIDF Research, while loan growth remained subdued thus far this year, there should be a pick-up in the numbers in the next couple of months, judging by a reversal in leading indicators in February 2023 after many months of contraction.
MIDF Research listed Malayan Banking Bhd
(Maybank) and Hong Leong Bank Bhd (HLB) as its top picks, with target prices of RM9.28 and RM24.91, respectively.
Meanwhile, Kenanga Research and RHB Research also maintained their “overweight” recommendation on the banking sector.
For Kenanga Research, the top picks were Public Bank Bhd and RHB Bank Bhd, with target prices of RM4.90 and RM7.10, respectively.
For RHB Research, the top picks were Maybank, with a target price of RM9.45, HLB at RM22.60 and CIMB Group Holdings Bhd at RM6.
In its report, Kenanga Research pointed out that the uninspiring market sentiment provided entry opportunities into the highly resilient banking sector.
“Fundamentals aside, sector valuations appear to be diminishing, given concerns of slowing economic outlook with inflationary concerns still very much at the helm,” the brokerage wrote.
“That said, depressed share prices are giving rise to highly attractive dividend yields with an industry average of around 6%.
“However, given prevailing macro risks with a volatile ringgit, we lean towards stocks with more fundamental backing for our recommendations,” it explained.
Kenanga Research said most industry-wide trends seen thus far were largely expected. This included NIM compression from tight deposit competition; sequentially lower credit cost; and uplift in earnings from the lapse of the prosperity tax.
“These factors are likely to persist for the remainder of 2023, with NIMs likely to ease from any hikes to the OPR,” it said.
RHB Research noted that despite top-line pressure from margins and moderating loan growth, banks had sufficient levers in place to support earnings and dividend growth.
