PETALING JAYA: The banking sector is oversold amid lingering uncertainties over tariffs, according to Kenanga Research.
“Based on past performances, we believe banks are adopting a conservative guidance on loan growth (where concerns may lie on more regionally exposed banks), while asset quality remains a minimal concern,” it said.
The research house, which maintained its “overweight” call on the sector, opined that the headwinds on net interest margins (NIMs), while still persistent, are less pronounced than before as funding costs ease.
It kept its expectation for the overnight policy rate to remain steady at 3% throughout the year.
For the third quarter of the year, Kenanga Research’s top pick for the sector continued to be AMMB Holdings Bhd
for its optimisation efforts, and emphasis on earnings sustainability to lift return on equity (ROE), with higher dividend yield prospects (6%) being a bonus.
Its second pick is CIMB Group Holdings Bhd as recent share price weakness is offering a more palatable entry with 6% dividend returns to mitigate concerns over its more challenging regional operations.
It also favours Malayan Banking Bhd, which continues to take market share among the big caps and is poised to lead in terms of earnings growth and dividend yield in the longer term.
As for non-bank financial institutions, Kenanga Research liked general insurer LPI Capital Bhd, which is slated for special dividend yields of up to 13% on top of its core 6% to 7% yields.
“LPI will benefit from synergistic gains from its acquisition by Public Bank Bhd with industry-leading net margins offering leeway to compete more aggressively in the market,” it explained.
The research house is also expecting a turnaround in valuations.
Benchmarking against the KL Finance index, the sector price-to-book value (PBV) declined to a one-year low of 1.08 times in May.
“The currently depressed valuations pushed sector ROE/PBV multiple to 9.8 times.
“This marks only the second time this level has been breached outside of crisis periods (such as the 2008 global financial crisis and the 2020 Covid-19 pandemic), the first being during the collapse of several US banks in the first quarter of 2023,” it said.
The research house opined that the sector is now likely at trough valuations, driven by concerns over sluggish loan growth and stubborn industry NIMs.
However, Kenanga Research highlighted that the industry is in a period of unprecedented asset quality with industry gross impaired loans hovering persistently below 1.5%.
This is guarded by the average bank loan loss coverage (including regulatory reserves) of 140%, which will hopefully lighten the need for hefty pre-emptive provisions as seen during the pandemic.
