This article first appeared in The Edge Financial Daily on January 25, 2018

Banking sector
Maintain market weight: The recent rally in selected banking stocks has raised overall sector valuation to a 12-month forward price-to-book value (PBV) of 1.38 times. Although PBV is at -0.5 standard deviation below the 10-year historical mean of 1.5 times, we note that structurally return on equity (ROE) has compressed significantly from a high of 16% to the current 10.2% due to more stringent regulatory capital requirements. On a regional comparison, the Malaysian banking sector is also not compelling with Singaporean and Thai banks trading at an even cheaper PBV of 1.32 times and 1.26 times, despite higher projected ROEs of 10.4% and 11.5% respectively. Our projected earnings per share growth of 7.2% also lags regional peers’ average of 9.5%.

Bank Negara Malaysia (BNM) has indicated that it may consider reviewing the current degree of monetary accommodation given the strength of the global and domestic macroeconomic outlook. Meanwhile, our UOB economics team is expecting a potential 25-basis-point interest-rate hike by BNM in 2018. That said, we believe BNM is unlikely to initiate an aggressive interest-rate-hike cycle as overall domestic consumption remains tepid on the back of rising cost of living and still-elevated household debts.

A rate hike will have a temporary boost to the net interest margin as assets are repriced faster than liabilities. Judging from most banks’ average deposit tenure, we expect the repricing of deposits to lag by an average of three months and with nearly 80% of the deposits to be repriced within six months. This will result in a fairly minor enhancement in earnings on a full-year basis assuming one or two rounds of interest-rate hikes in 2018. Assuming a positive repricing gap of two to three basis points and all things unchanged, our sensitivity analysis indicates that every 25-basis-point hike in interest rates could enhance banks’ earnings by an average of 2%. Banks with a higher domestic floating rate loan profile could experience a larger positive repricing gap (Alliance, BIMB, CIMB and RHB), while banks with high domestic current and savings accounts (Maybank, BIMB and Alliance) could also benefit. — UOB Kay Hian, Jan 24