AN investor who put his money on Public Bank Bhd slightly more than 10 years ago would have seen his investment reaping a total return of some 300% today. This includes capital gains, dividends and other forms of distribution. Public Bank shares are now trading at RM19.68 apiece, compared with RM4.57 on Jan 3, 2007.

In second spot is Hong Leong Bank Bhd, with total returns of 260% over the same period, while Alliance Financial Group Bhd, Affin Holdings Bhd, RHB Bank Bhd and AMMB Holdings Bhd returned than 100%.

Interestingly, banking giants Malayan Banking Bhd and CIMB Group Holdings Bhd trailed their smaller peers, with total returns of 87% and 98% respectively.

The returns banking stocks have delivered over the last 10 years are commendable, but will this still hold true going forward?

Some take the view that banks could be on the brink of a turnaround as the years of low interest rates come to an end.

“I would consider banks as cyclical stocks. Return on equity (ROE) is on a downtrend because the global economy is in a down cycle. Banks are a good proxy for the economy and are quite cyclical but now, they could be on the cusp of a turnaround, says a local banking analyst.

“The US Federal Reserve has just increased interest rates. We are heading back to a normalisation of interest rates — there is no more crazy low interest rate environment. The era of extremely loose monetary policy is behind us. Now, the bias is to the upside. The next movement is more likely to be up than down,” she adds.

The analyst also points out that banks will have to face up to the fact that stricter capital requirements are here to stay.

“They will have to deal with this — and they can live with that reality. Profitability is a lot more sensitive to net interest margins (NIMs) and the business cycle than ROE. If things are good and you are making decent margins, you can offset the higher capital requirements. If you look at the stock prices of Singapore banks DBS and OCBC, they have turned up quite strongly this year compared with last year. The question is, can local banks follow that trend?” she asks.

Maybank Investment Bank Research is projecting faster net profit growth for the banking sector for 2017, from 4.2% year on year previously to 10.5%. The research house has already raised its 2017 operating profit growth forecast to 5.9% from 5.1% as it sees lower NIM compression.

“The risk to earnings, in our view, is still to the downside if credit costs prove to be stickier than expected. We project double-digit 2017 core net profit growth for CIMB and RHB, predominantly on lower credit costs,” says the research house, which has a “neutral” call on Malaysian banks.

However, there are many who are not keen on banking stocks for now.

“Well, for a fund’s portfolio purposes, it would still make a good investment. The market capitalisation of banks is huge compared with that of companies in other sectors. It is a stable source of investment for funds and there is the dividend yield as well,” says a market observer.

Inter Pacific Securities head of research Pong Teng Siew concurs. He says banking stocks have been doing well recently because of a fresh influx of foreign funds that focused on banking stocks.

“From a tactical approach, big funds would probably invest in banks because you can’t find that much liquidity in other stocks,” he says.

But from a retail investor point of view, Pong is not too keen on banking stocks. He points out that growth prospects for banks are limited, with compressed margins and lacklustre loan growth.

“Even from a long-term investment perspective, I think retail investors may give banks a miss because there are many other choices out there that can give better returns,” he muses.

MIDF Research, which has maintained its “neutral” stance on the banking sector, says in a report that it sees the challenges of 2016 spilling over into 2017 on top of the lack of clear concrete catalysts or game changers going forward.

“Our view of structural and cyclical headwinds such as a moderate economy, slower loans growth, downward pressure on NIMs and challenging asset quality remains and will prevail in 2017,” it says.

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