KUALA LUMPUR (May 31): The recent strong showing of first-quarter results for some of the Malaysia-listed banks has brought investor attention back into the sector.

Banking stocks have come off their recent dips in May as analysts — largely positive towards the sector since late last year — have pushed their target prices (TPs) for certain banks higher following the latest results for the first quarter of 2021 (1Q21) (see chart).

“We have been consistent with our positive stance on the banking sector since the end of last year. In fact, it remains one of our key themes for 2021, along with automotive and the construction sector,” said MIDF Research vice-president Imran Yassin Md Yusof.

“We believe that based on recent weakness, in our market experience, valuations of banks seem attractive. Therefore, we opine that it is a good time to invest in the sector,” Imran said in an email reply to The Edge.

“For the banks that have yet to release their results, we expect to see similar trends, which are lower provisions (despite possibility of additional management overlays), higher income growth, strong CASA (current account savings account) growth and decent gross loan growth driven by mortgages, auto loans and SMEs (small and medium enterprises).

“We also expect asset quality to be stable,” he commented, adding that the sector's earnings recovery should be sustainable.

“We expect to observe lower provisions this year, which should translate into better earnings. In addition, we expect that strong CASA growth will continue in the next coming quarter, which should improve the NIM (net interest margin), and this will also result in better net interest income, which would add to the earnings recovery for banks this year,” he said.

“Our top picks for the sector at the moment are Public Bank Bhd (“buy”; TP: RM5.10), Malayan Banking Bhd (Maybank) (“buy”; TP: RM8.90) and RHB Bank Bhd (“buy”; TP: RM5.90).

A fund manager contacted was less optimistic about whether banks’ impressive earnings growth would be sustainable in the immediate coming quarters amid the economic uncertainties.

However there are still investment opportunities when looking at the undemanding valuations, said Areca Capital chief executive officer (CEO) Danny Wong.

Year to date (YTD), share prices of Malaysia-listed banks have seen more losses than gains, with the losses recorded at 3% to 20%. The exceptions are Public Bank (up 2.91%), Hong Leong Bank Bhd (HLB) (up 0.11%) and CIMB (traded flat). The sector’s historical yield ranges from as low as 1.1% to as high as 6.34%.

Further, kitchen-sinking done in 2020 in the face of the pandemic may provide a buffer for the coming year, with further potential upside from the over-provision moving forward.

“If the recovery theme plays out, there is a potential reversal of over-provision from next year, and probably this year,” Wong said.

From an asset quality perspective, some analysts opined that investors might be more in favour of banks with higher exposure to SME and retail-related loans, as opposed to higher exposure to chunky corporate loans which carry more concentrated risks.

The long-term outlook remains positive as the Covid-19 vaccination drive picks up, Wong said.

“Now may not be the right time to talk about loan growth yet, but the potential lies on the premise that herd immunity can be achieved by some time next year,” he said.

Investors may also take their positive cue from how Maybank shares continued to rise on its dividend ex-date last Friday.

In March, year-on-year (y-o-y) loan growth accelerated slightly to 3.9%, compared with 3.7% in February, Bank Negara Malaysia's (BNM) April note showed.

At this point, banks with a conservative business model and client base appear to be more solid in withstanding the economic headwinds, said Areca Capital’s Wong. In the long run, however, he said those with a stronger digital and innovation drive to lower their costs and capture the newer and younger markets may be a better bet.

BNM is expected to issue five digital banking licences by next year. The five licence holders are expected to change the operating landscape of the banking industry moving forward.