KUALA LUMPUR (March 30): The Malaysian banking sector fundamentals are well founded and unlikely to be pressured by the recent collapse of Silicon Valley Bank and Signature Bank, as well as UBS' sudden takeover of systemically important Credit Suisse, according to Kenanga Research.

“That said, it is understandable if investors prefer to stay on the sidelines as global sentiment for the financial sector has tumbled,” said the research firm, which maintained its "overweight" call for the sector.

Although this could create numerous buying opportunities for bank stocks, Kenanga has selected a few names that offer a greater safety net among their peers and avoided banks with higher non-interest income exposure.

“With that, for the second quarter [2QCY2023], we opt to promote Public Bank Bhd as it is the leading bank in terms gross impaired loans (GIL) reading at 0.4% (versus peer average: 1.5%) backed by a highly collateralised loans book, thanks to a substantial mortgage portion (41% of total books),” said Kenanga in a note on Thursday (March 30).

In addition, Public Bank's recent stock selldown could reverse once clarity on ambiguity over shareholder and ownership structure is achieved, the research firm said.

On top of that, Kenanga also likes RHB Bank Bhd due to the relevancy of strong capital safety, which it said will be in the limelight again.

“RHB Bank continues to lead its peers with its CET-1 buffers (17% versus peer average of 14%). On the other hand, the bank’s dividend prospects become more promising with targeted payouts of circa 55% looking to generate yields of 7%-8%. Also, developments on its upcoming digital bank with Boost could support interest,” Kenanga added.

The research firm has “outperform” calls for Public Bank and RHB Bank with target prices of RM4.90 and RM7.10 respectively.

Unlike 2022, banking stock shares experienced mixed performances in relation to key indices.

“Despite having reported commendable 4QCY2022 earnings in February 2022; YTD (year to date) March 2023, only Hong Leong Bank [Bhd], Maybank (Malayan Banking Bhd), and RHB Bank [Bhd] have outperformed the FBM KLCI Financial Index, albeit still lower than when they started the year.

“We see these names to be credited as more conservative bets by investors for their asset quality safety and dividend returns,” said Kenanga.

Kenanga also has “outperform” calls for Hong Leong Bank and Maybank with target prices of RM23.35 and RM10.10 respectively.

Notably, it said, although Public Bank also demonstrated strong earnings concerns over its shareholdings, the structure has led to some apparent profit taking since December 2022.

Meanwhile, the main underperformer is Bank Islam Malaysia Bhd ("market perform", TP: RM2.30), possibly due to indications that asset quality could lag from inflation-led affordability concerns, owing to its high retail portfolio.