KUALA LUMPUR (March 2): Banking stocks, being the proxy for an economic recovery, are having a good run, bolstered by mass vaccination.

Malaysia's top six banking groups in terms of market capitalisation saw their market value jump a collective RM118.21 billion since the pandemic struck in March 2020.

The market cap expansion is almost four times the combined market value of the rubber glove makers Top Glove Corp Bhd — the world's largest glove maker — and Hartalega Holdings Bhd — the world's largest producer of nitrile gloves — which stood at RM32.85 billion based on Wednesday’s (March 2) closing price.

The six entities, namely Malayan Banking Bhd, Public Bank Bhd, CIMB Group Holdings Bhd, Hong Leong Bank Bhd (HLB), Hong Leong Financial Group Bhd and RHB Bank Bhd, are Bursa Malaysia’s heavyweight banking stocks and constituents of the benchmark FBM KLCI.

Public Bank saw the biggest market cap jump, an addition of a whopping RM36.45 billion or 74.1% to RM85.6 billion, compared with RM49.15 billion on March 19, 2020 — a day after the country imposed its first movement control order.

Malayan Banking, the country's largest lender, came in second with a market cap expansion of RM26.6 billion or 33.42% in the same period to RM106.19 billion from RM79.59 billion.

Next was CIMB, whose market value swelled to RM51.41 billion from RM31.16 billion, after adding RM20.25 billion or 64.99%, followed by HLB, whose market cap rose RM18.47 billion or 71.12% to RM44.44 billion from RM25.97 billion.

HLB's parent, Hong Leong Financial Group Bhd, also saw its market value jump RM9.53 billion or 73.13% to RM22.56 billion from RM13.03 billion, while RHB Bank’s market cap rose RM6.91 billion or 40% to RM24.07 billion from RM17.16 billion.

In a note on Wednesday, Kenanga Research upgraded the banking sector to "overweight" from "neutral" on the back of clear tailwinds — economy-fuelled growth, lower asset quality risks, recovering trading activities, larger fee-based income — towards wider earnings expansion, after noting that the recent fourth quarter earnings season had mostly demonstrated positive tidings ahead for banks.

And the year 2022 had gone off on a good start for the sector, its analyst Clement Chua noted, with system loans in January reflecting a 4.7% year-on-year increase, with better numbers in both the household (an increase of 4.7%) and business (up 4.6%) fronts. Compared to December 2021, there was a 0.6% and 0.5% growth, respectively, he added, with the main drivers of household loans coming from housing loans and hire purchases.

"Meanwhile, business loans were funnelled towards more working capital needs, likely to cope with the reinvigorating economic landscape... for CY22 (calendar year 2022), we believe an annual growth of 5% to 5.5% is plausible, given the current momentum demosntrated by ongoing economic activity. This is also closely in line with our in-house 2022 GDP forecast of 5.5% top 6%," Chua said.

He also said current account-savings account (CASA) ratio are once again peakish, with totap deposits remaining high in January, up 6.5% y-o-y, with CASA-to-deposit mix trailing close to the industry high of 30.5%. There was a slight 0.6% month-on-month decline, which Chua speculated could be the result of withdrawals ahead of Chinese New Year festivities and he anticipated customers would replenish their accounts subsequently. "For the moment, we keep our CY22 deposits growth target in line with our loan predictions, at 5% to 5.5%," he added.

The sector's developments in January prompted the research house to relook at the sector towards its prospect in 2023, Chua said, adding that "...if the economy continues to recover without disruption, demand for loans could be exponential and its growth may mitigate any net interest margin (NIM) erosion from the ongoing competition of deposit".

Another catalyst for the banking sector is higher interest rates, said Chua.

“Most banks anticipate at least one overnight policy rate hike in 2HCY22 and this should translate to slight bump to annualised NIMs thereafter. We anticipate non-interest income to stabilise from the industry-wide decline in 2021 as we operate in a more normalised trading and investing landscape. Meanwhile, the growth in fee-based income will help to build a more sustainable base for the banks,” he added.

Chua also thinks earnings surprises may be seen when the banks eventually write back their provisions and overlays.

“Dividend payments are also mostly back to pre-Covid levels, indicating that soundness in capital management has recovered,” he added.

Kenanga Research now has "outperform" calls in the sector, with its top picks being Alliance Bank Malaysia Bhd (target price [TP]: RM3.85) — which it said has fundamentals comparable to its larger-cap peers — and RHB Bank (TP: RM6.70). For the latter, it sees a potential boost in sentiment from the bank’s participation in the digital banking bid.

Its other "outperform" calls are for Affin Bank Bhd (TP: RM2.10), AMMB Holdings Bhd (AmBank) (TP: RM3.75), and Maybank (TP: RM10.85).

Chua said Affin is now at the forefront as a strong dividend contender, while AmBank could return to pre-global settlement levels.