KUALA LUMPUR (March 31): Investment analysts have maintained their "overweight" recommendations on the banking sector as it has sufficient buffers to withstand extreme stress, with earnings expected to remain stable in 2022.

Hong Leong Investment Bank (HLIB) Research believes the sector's risk-reward profile is skewed to the upside as valuations are undemanding. 

The research firm sees an upswing in the overnight policy rate (OPR) only on the cusp of an economic recovery that will benefit banks, analyst Chan Jit Hoong said in a note on Thursday (March 31).  As such, HLIB remains bullish and has a more broad-based stock-buying strategy for the first half of 2022.

TA Securities Research, meanwhile, forecasts net profit growth at 7.2% in 2022 and 19.6% in 2023 for the banking sector. Its analyst Wong Li Hsia said this is due to the momentum of domestic economic activity, which should continue to improve gradually, leading to stronger loan growth projections for 2022, and the reopening of international borders.

“We believe that with the central bank proactively monitoring developments closely and ensuring sufficient liquidity in the system, financial institutions intensifying collection efforts, identifying vulnerable borrowers and extending repayment assistance to those in need, and a conducive interest rate environment, it should help to keep systemic asset quality risk in check,” said Wong. 

On the other hand, AmInvestment Bank Research has maintained its "overweight" on the sector as the upward trend in interest rates benefits banks' interest income and provisions may be reduced by potential reversals of management overlays due to an improving trend in loans with repayment support (RA).

“With a high percentage of borrowers resuming payments after the expiry of financial assistance, we see room for potential write-backs of provisions. However, in the near term, banks are likely to hold on to the provision buffers and not release substantially the management overlays as yet.

“This is to be conservative until greater visibility has been achieved for household and SME (small and medium enterprise) loan borrowers’ repayment behaviour. Also, with an improved earnings outlook, we are seeing normalising dividend payouts by banks,” said analyst Kelvin Ong. 

On another note, against the background of Bank Negara Malaysia’s prudent stance, Kenanga Research said it is still confident that investors could flock into the banking space. It reckons that demand for loans could be exponential and its growth may mitigate any net interest margin (NIM) erosion from the ongoing competition for deposits. 

“Most banks anticipate at least one OPR hike in 2HCY22 (the second half of calendar year 2022) and this should translate into a slight bump to annualised NIMs thereafter. We anticipate NOII (non-interest income) to stabilise from the industry-wide decline in CY21 as we operate in a more normalised trading and investing landscape. 

“Meanwhile, growth in fee-based income will help to build a more sustainable base for banks. Dividend payments are also mostly back to pre-Covid-19 levels, indicating that soundness in capital management has recovered,” said Kenanga analyst Clement Chua.  

For large-sized banks, HLIB’s Chan said the research firm likes Malayan Banking Bhd (Maybank) with a "buy" call and a target price (TP) of RM9.40 for its strong dividend yield and Public Bank Bhd ("buy"; RM4.80) for its large potential headroom to perform management provision overlay write-backs. 

“For mid-sized banks, RHB Bank Bhd (TP: RM7) is favoured for its high CET1 (common equity Tier 1) ratio and attractive price tag. As for small-sized banks, BIMB (Bank Islam Malaysia Bhd) (TP: RM3.45) and Affin Bank Bhd (TP: RM2.35) are preferred. We like the former for its positive structural growth drivers and better asset quality, while the latter has special dividend potential and strong financial metrics,” the analyst said. 

TA Securities, meanwhile, maintained its "buy" recommendations on Maybank (TP: RM9.40), Hong Leong Bank Bhd (RM24.60), RHB Bank (RM6.40), CIMB Group Holdings Bhd (RM6.30), Alliance Bank Malaysia Bhd (RM4.20) and Affin Bank (RM2.40). 

“We downgrade Public Bank from 'buy' to 'hold' (TP: RM4.80) as the potential upside has narrowed to between 7% and 12% due to the recent increase in its share price. Similarly, we downgrade AMMB Holdings Bhd from 'hold' to 'sell' (TP: RM3.80) as the potential upside has fallen to below 7%,” said TA Securities’ Wong. 

AmInvestment’s Ong, on the other hand, said the research firm's top buys are RHB Bank with a fair value (FV) of RM7.10, CIMB (FV: RM6.50) and Maybank (RM10). 

“We like CIMB, RHB Bank and Maybank due to an expected improvement in their core operating income with the interest rate uptrend benefiting underlying NIMs and lower provisions for loan losses with the tapering of new applications for financial assistance in Malaysia, while that for overseas operations (Indonesia, Thailand and Singapore) are stabilising,” said Ong. 

AmInvestment also likes CIMB due to its undemanding valuation, potential return on equity uplift from the impairment of goodwill and intangible assets, coupled with the group’s cost initiatives to trim its operating expenditure. 

“[And] RHB Bank is seen to be in a strong capital position with a CET1 ratio of 16.8% as well as trading at an attractive valuation of 0.8 times P/BV (price-to-book value) for FY23 (the financial year ending Dec 31, 2023).

“For mid-cap banks, we like Alliance Bank (FV: RM4.20) and Bank Islam (RM3.70) due to attractive valuations with both trading at 0.9 times for FY23 below one times P/BV and expectations of an improvement in credit cost ahead. In addition, dividend payouts of Alliance Bank are seen as normalising,” Ong added. 

On another note, Kenanga’s Chua said the research firm had an "outperform" call and a TP of RM3.85 for Alliance Bank as well as "outperform" and a TP of RM6.70 for RHB Bank. The two banks are its top picks, having gained 26% and 11% respectively in price movements.