KUALA LUMPUR (June 3): Over the past two months, the banking stocks have largely been left out of the rally on the local market amid concerns on more loans turning sour and dim earnings prospects in the current harsh economic climate.
But interest seems to be returning to the banking stocks that are currently trading at at least 10 year-low price-to-book valuations.
All the banking stocks climbed today. The surge in buying interest was reflected by a 7.2% or 910.19 points rise in the Bursa Malaysia Finance Index to close at 13,724.
Public Bank Bhd, one of the worst performing banking stocks, led the climb. Its share price jumped 11% or RM1.74 to RM17.38, followed by Hong Leong Bank, which soared 7.3% or RM1.02 to RM15.02 and Maybank, rose 47 sen or 6.26% to RM7.98.
Fund managers and analysts have attributed the sudden surge in buying interest to sectorial rotational play and bargain hunting as the key driving factors.
TA Investment Management chief investment officer Choo Swee Kee told theedgemarkets.com that funds flowed into the banking stocks sector mainly because they are the laggards now.
“With banks normally deemed as the bellwether for the economy, the reopening of economy has fuelled positive sentiments too,” Choo said.
Meanwhile, Lim Tze Cheng, head of research at EquitiesTracker Holdings Bhd concurred that the banks are the laggards and noted that “money rotating out from rallied sectors has to go somewhere, and bank stocks which had underperformed relatively to others, are currently favoured”.
Interestingly, Lim pointed out that even before the COVID-19 pandemic, Malaysian bank stocks have been on a down-trend since 2018 due to lack of growth prospects.
He explained that this is because Malaysia banks are more towards conventional banking businesses that are skewed heavily towards residential mortgage loans, hire purchase loans and commercial working capital loans.
In his opinion, the prospect of a slowing property industry was one of the main reasons banking stocks had fallen out of favour.
Moving forward, Lim believes that “the worst is over” for banks' share prices, as he is optimistic on the economy recovery path with the swift and synchronized actions taken by authorities worldwide, such as the introduction of massive liquidity injections into the economies.
As such, he thinks there could be more upside surprises of economic data going forward which might dictate the share price performance.
Hong Leong Investment Bank banking analyst Chan Jit Hoong pointed out that Malaysia banking stocks are currently catching up with their regional peers which have already been on an uptrend.
Chan opines that the bank sector’s inexpensive valuations offer compelling reasons to invest in despite near-term COVID-19 related headwinds concerning moratorium loan loss booking and asset quality.
He favours banks that have strong capital ratios for instance RHB Bank and Alliance Bank which are trading at price-to book (PB) valuations of less than one time, and currently sitting at 2 notches standard deviation below their historical range as well as Global FinanciaL Crisis (GFC) trough valuation.
He holds buy ratings for the two banks, and given target price of RM5.30 to RHB and RM2.35 to Alliance respectively.
A quick look at the current banks’ valuations, other than BIMB Holdings Bhd, despite today’s strong move, show that all banks are currently still trading at PB valuations that are lower than their respective GFC period.
Currently, known for its credit-stringency, Public Bank’s PB stands highest at 1.56 times followed by Hong Leong Bank at 1.17 times and Maybank at 1.15 times, suggesting that investors are valuing defensiveness in view of challenging economic times ahead.