This article first appeared in The Edge Malaysia Weekly, on February 8 - 14, 2016

AMID a challenging economic environment, stricter lending criteria, higher cost of funds and concerns over asset quality, banking stocks have fallen out of favour with investors, declining by more than 20%. Banks that previously enjoyed high foreign shareholding participation, which helped support prices, have been most affected. Looking at the fall in banks’ share prices, is it time to invest in their counters?

Alliance Financial Group Bhd (AFG), AMMB Holdings Bhd, CIMB Group Holdings Bhd and RHB Capital Bhd, counters with high foreign shareholding participation in the past, have seen their share prices plunge more than 25% over the last year.

Other local banks did not fare well either. Affin Holdings Bhd saw 24% erased from its market capitalisation over one year, while BIMB Holdings Bhd’s share price shed 17%. Hong Leong Bank Bhd (HLB) was spared, it fell only 3% over the year.

Only Malayan Banking Bhd (Maybank) and Public Bank Bhd managed to summon marginal increases in their share prices of 1.83% and 3.15% over the same period.

That said, the fall in share prices has made banks’ dividend yields look attractive. On average, the banking sector rewards investors with a 4% net dividend yield based on current share prices. Based on UOB Kay Hian’s research note, Maybank gives investors the highest dividend yield at 6.8%, followed by AMMB and AFG at 4.4%. Most other banks pay out between 3% and 4%, with HLB the lowest at 2.7%.

In terms of forward price-to-book value, Public Bank has the highest valuation at 2.13 times while Affin has the lowest at 0.52 times.

Public Bank, which was the first to release its October to December quarterly results last Wednesday, reported a RM6.49 billion pre-tax profit, surpassing RM6 billion for the first time. Net interest income for the full year grew 7.5% to RM6.38 billion, while non-interest income increased 22.4% compared with a year ago. The bank attributed the increase to higher income from its unit trust business, foreign exchange-related transactions and fee income from banking operations.

However, Public Bank’s commendable performance in the current economic environment could be an exception to the norm. Based on the last three quarterly performances, most other banks have missed consensus estimates on earnings performance.

In the latest banking statistics released by Bank Negara Malaysia, full-year loan growth in 2015 came in at 7.9%, within analysts’ estimates. Unsurprisingly, it was well below the 9.3% it chalked up in 2014, as both the business and household segments saw a decline in loan growth.

For 2016, analysts are expecting loan growth to taper to around 6%. Maybank Investment Bank Research, which forecast loan growth to come in at 6.5% for 2016, says in its report that this is premised on a slowdown in household loan growth to 6.1% from 7.7% in 2015 and a moderation in non-household loan growth to 7% from 8%.

Kenanga Research appears to be even more bearish on loan growth as it is forecasting growth of between 5% and 6% this year.

“As for 2016, systems loan growth for both the business and household segments are expected to soften further due to the subdued economy — weak ringgit, lower commodity prices — denting public and private expenditure. In addition to weak purchasing power, a volatile equity market and cooling property prices are raising consumer pessimism and will discourage spending. Hence, we believe that industry loan growth will taper to 5% to 6%,” it says.

Bank Negara’s December statistics also revealed that absolute non-performing loans (NPL) rose at a faster pace of 4.2% year on year (y-o-y) compared with 2.1% y-o-y in November. Nevertheless, the industry’s gross NPL ratio was stable at 1.6%.

Analysts expect to see a rise in NPL this year but they opine that the increase will not be significant.

“NPLs will likely rise this year due to the collapse in oil prices, which could affect some oil and gas companies, deterioration of the ringgit, which might impact importers and the increase in retrenchments in corporations that we are reading about these days. But the rise will not be significant,” says an analyst with a bank-backed research house.

Maybank IB Research, which is “neutral” on the sector, also says in its report that NPL levels are benign at this moment, but absolute NPLs are no longer contracting y-o-y as they did in the past.

“We have already imputed higher NPL ratios and higher credit costs into 2016, but we do still expect the overall credit environment to remain fairly benign, unless economic growth slows much more than anticipated and the unemployment rate picks up sharply,” it says.

At present, most analysts are “neutral” on the sector given the headwinds that the banking sector faces. Many of the analysts also opine that the sector is lacking catalysts now.

“We still see the cost of funds increasing and margins are still compressed. We don’t see strong recovery in the non-interest income segment,” says an analyst with a local research house.

But it is not all gloom and doom for the sector, some research houses have issued “buy” calls on some banks.

Nomura Research says in a regional report that it remains cautious on Malaysian banks but likes Maybank for its strong deposit franchise, manageable credit costs and inexpensive valuations. It has a target price of RM9.70 on Maybank.

MIDF Research and UOB Kay Hian have “buy” calls on Maybank. MIDF likes Maybank for its lower base rate, which gives it a competitive advantage over its peers on cost of funds, its diversified earnings as well as attractive dividend yield. UOB commented that Maybank remains its top pick given its undemanding valuations, above-industry return on equity and dividend yield.

UOB Kay Hian also has a “buy” call on RHB Cap because of its undemanding valuations and commendable earnings recovery. Similarly, Kenanga has an “outperform” call on RHB Cap.

“We see deep value in RHB Cap with its forward price-to-book value merely trading at 0.7 times compared with the industry’s forward price-to-book value of 1.5 times,” says Kenanga in a report.

Meanwhile, it looks like those thinking of investing in this sector may need to have holding power and patience as it could take some time before share prices rise on any positive catalysts.

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