MIDF Research maintained a “positive” call on the banking sector on the back of strong valuations and dividend outlook.
PETALING JAYA: The banking sector, which saw robust recovery in loan growth in 2023, will continue to show resilience and be favoured by investors for its strong valuations and dividend yield outlook.
“We find current sector valuations fair, considering the absence of strong earnings catalysts such as flattish net interest margin (NIM) and modest recovery in loan growth. Share prices should be supported by attractive dividend yields,” UOB Kay Hian (UOBKH) Research analyst Keith Wee said.
“Overall, sector dividend yields are attractive at over five and credit costs should remain stable, given the robust provision buffers in place,” he added.
His top sector pick is CIMB Group
Holdings Bhd (CIMB), mainly due to its high beta, having the highest foreign shareholding among the banks and strong return on equity trajectory.
“These factors position the stock favourably to capitalise on a growing risk-on investment environment in the second half of 2024 and foreign inflows into our equity market,” he added.
Similarly, MIDF Research maintained a “positive” call on the sector on the back of strong valuations and dividend outlook.
“We feel that upside re-rating drivers should provide a boost to sector valuations, especially since the worst seems over for now,” the research house said .
“Following indication that asset quality and NIM concerns were exaggerated, we think the sector remains attractive for its valuations. We do urge investors to be more selective with their picks, as not all banks have optimal outlooks,” it added.
In November, system loan growth gained traction to 4.9% year-on-year (y-o-y) from 4% in October, mainly fuelled by the business segment, which experienced an uptick of 2.6%, while households remained steady at 5.8%.
Deposit growth expanded 5.3% y-o-y in November versus 4.3% in October, on the back of stronger current account saving account balances, foreign currency and “other” deposits. Overall, November’s loan-to-deposit ratio stayed steady at 86% (versus February 2018’s peak of 89%).
Asset quality was resilient with the gross impaired loan ratio nudging down one basis point month-on-month to 1.69% in November; with households remaining flat but businesses falling four basis points.
However, leading indicators have softened as loan applications growth declined to 7.7% y-o-y in November versus 29.9% in October, while loan approval decreased 2.4%.
Kenanga Research projected a loan growth range of 4.5% to 5% in 2024, which is slightly higher than its 2023 assumption of 4% to 4.5%.
This is in line with its in-house gross domestic product (GDP) growth of 4.9% this year.
“We expect this year’s loan growth to continue to be supported by affordable homes, which also appear to be the preference for developers within their new launch pipelines. That said, we opine secondary market transactions could also see some pick-up as banks may now be more competitive with the margin spread for newly on-boarded mortgages.
“On the business front, fewer uncertainties with regards to domestic economic policies and interest rates may spur businesses to once again focus on expanding.
“Meanwhile, a weaker domestic currency may be a booster for exporters and could drive spending from foreign tourists, possibly stimulating growth in these areas,” it added.
The research house believes the banking sector’s resilience will continue to be relevant to investors, especially with more prominent recessionary concerns seen in key regional markets.
Domestically, the research house expects asset quality controls to remain tight, governed by Bank Negara’s strict requirements and prudent management by banks.
Kenanga Research, which maintained an “overweight” call on the banking sector, said at current price points, banking dividend yields still lead with 6% to 7% possibly being offered.
“For top picks, we opted to focus on high growth merit names which could see both near-term and long-term interest for investors, being CIMB, AMMB Holdings Bhd (AMMB) and Alliance Bank Malaysia Bhd,” it added.
The research house anticipates the overnight policy rate (OPR) to remain stagnant at 3% in 2024, premised on prolonged containment of inflationary pressures with a weak ringgit exaggerating imports.
“This may be further stirred by the pending subsidy rationalisation and to a lesser extent, the implementation of luxury taxes.
“On the flip side, the likelihood for OPR cuts could stem from the materialisation of a recession in foreign markets namely, US markets,” it added.
Meanwhile, CGS-CIMB Research expects a strong recovery in loan growth, mainly from business loans.
“The banking industry’s total loans expanded by 4.2% in the first 11 months of 2023. As such, we believe our projected 2023 loan growth of 4% to 5% was likely met, as we do not expect the industry’s total loans to have contracted month-on-month in December 2023.
“Although we expect a slowdown in 2024, automotive loan growth (from more than 9% in 2023 to the low single-digit rates in 2024), we are still projecting another 4% to 5% loan growth for banks in 2024, as we think business loan growth would recover to above 3% (on the back of our higher projected GDP growth of 4.6% in 2024, versus 4% in 2023),” the research house said.
CGS-CIMB has reaffirmed its “overweight” call on banks, supported by the sector’s strong dividend yield of 5.3% for 2024. Its top picks for the sector are Hong Leong Bank Bhd, Public Bank Bhd and RHB Bank Bhd.
HLIB Research is, however, “neutral” on the banking sector as the risk-reward now is more balanced as there are no new positive catalysts to spur share prices significantly higher.
The research house is projecting financial year 2024 (FY24) and FY25 sector profit to grow at a slower rate of 5% and 4% respectively, compared with 14% in FY23, which lags the broader market as well (the FBM KLCI is seen to rise at a quicker 8% in FY24).
“This is no thanks to NIM unable to recover meaningfully, non-interest income growth to slow and no net credit cost write-backs. Regardless, valuations are not excessive and hence, we feel it is too premature to turn full-on bearish,” it added.
The research house likes Public Bank Bhd for its defensive qualities and multi-year low foreign shareholding, while AMMB is favoured for its dividend payout in the near future and Alliance for its inexpensive valuations.
