Putting money on the banks

BANKING stocks have been on a roll this year, largely in line with how the economy has been growing.

With the latest gross domestic product figures reflecting the country’s strongest growth since 2022, banks have rallied to their highest in about four years.

Foreign funds, encouraged by the strong economic growth as a result of a surge in foreign direct investment, have been pouring money into local stocks.

In the last week of August alone, foreigners bought some RM1.5bil worth of shares, the highest net weekly buying since March 2016.

Of this RM1.5bil, a whopping 86% went to the financial services sector.

Fund managers say it’s not surprising that banks are the beneficiaries as they are often viewed as the benchmark as well.

After three years of losses, the ringgit has finally been outperforming its Asian peers and this is also lending some optimism to finance-related stocks.

More notably, owing to their size, banks are the best stocks to buy, says one fund manager.

“Ours is a small market, other than the top 30 largest stocks, others are not big or liquid enough for foreign funds to even be interested in,” he says. The finance sector accounts for the largest weightage of the country’s stock market benchmark index, weighing in at more than 30%.

More interestingly, Malayan Banking Bhd, CIMB Group Holdings Bhd and Public Bank Bhd collectively make up more than one-third of the weightage of the MSCI Malaysia Index which is used by global institutional investors to benchmark their fund performances.

This easily explains why banks have been enjoying the most attention from foreigners.

Fortress Capital group founder and CEO Datuk Thomas Yong calls banks the “first stop” for foreign portfolio inflows, particularly when there is strong broad-based economic growth potential.

“Bank stocks generally offer the necessary large trading volumes for foreign funds to establish significant positions with ease.”

Meanwhile, banks themselves have reported financial results that were fairly good, or at least within expectations in the latest quarter.

Loan applications have surged across all sectors with a total month-on-month growth of 24% and a year-on-year growth of 18%.

Kenanga Research tells clients in a report that all of the country’s 10 banks reported earnings within expectations.

“Near-term fundamentals for the sector remain intact with loans growth to be supported by strong domestic demand and economic development, net interest margin pressure subsiding with cost of funds showing moderation, and asset quality risks becoming less prevalent,” it says.

To buy or not to buy

Nevertheless, it does warn of risks.

In the same report, the research house says one of the main risks of buying banking stocks is that there is a possibility of excessive lending by the banks to match current market demand. This may in turn expose them to excessive risk build-up in their portfolios.

Additionally, banking stocks are also one of the first to dive when there are major sell-downs globally, and are extremely sensitive to interest rate movements.

A former CEO of a fund management company says that at current valuations, banks are “no longer” attractive.

“I’ll wait for the next sell-down,” he quips.

Seasoned high-net-worth investor Ian Yoong Kah Yin also reckons that he would buy bank stocks only on weakness.

“The stock that I would buy is Hong Leong Bank, which to me, is one of the best managed banks in Malaysia.

“It it trading at 11 times TTM (trailing 12 months) and nine times FY25, has an attractive dividend yield of 3.5% and its return on equity is expected to improve from 11% to 13%,” Yoong says. Banks in Malaysia, like many in the region are facing increasing competition from digital banks which are fighting hard for customer deposit and loans.

Moreover, a low interest rate environment has eroded their margins for the longest time and this has caused many to prioritise non-interest income.

At its recent results briefing, CIMB said it was optimistic about growing its non-interest income amid increasing foreign fund flow.

Increased foreign flows into the country’s capital markets have allowed the lender to be at the forefront of facilitating some of these flows, according to the bank.

Globally, Deloitte Centre for Financial Services, in its 2024 banking and capital markets outlook, says deposits have become a “ferocious battleground”. “Retail banks are competing with digital banks offering higher deposit costs. And in the payments arena, digital wallets and account-to-account payments are fast becoming the de facto payment options in many countries, while buy now, pay later, or BNPL for short, is more widely accepted as a mainstream offering and alternative to credit card financing.”

Deloitte reckons that, going forward, the size and scope of the global banking space will continue to change.

It notes that the global banking industry has already seen fundamental shifts with Chinese and American banks dominating global rankings.

“Over the next decade, more banks from India and the Middle East are expected to join the ranks of the top 100, tilting the balance toward Asia and the Middle East.”

In the same report, the professional services group also notes that relationships between banks, financial technology (fintech), and big techs are evolving rapidly.

“Fintechs are largely no longer seen as adversaries; collaboration with incumbents is now commonplace.

“With increasing industry convergence, strategic partnerships of banks with franchised brands in technology and other non-financial industries is becoming the norm for customer acquisition and retention.”