HLIB Research maintains ‘overweight’ position in banks given undemanding valuations and rising policy rates

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KUALA LUMPUR (8 Mar): Hong Leong Investment Bank (HLIB) Research maintained its “overweight” position in the banking sector as valuations are undemanding and the bullish overnight rate (OPR) cycle will benefit banks.

In a note published Tuesday, March 8, HLIB analyst Chan Jit Hoong said he believes the sector’s risk-reward profile is biased to the upside as valuations are undemanding and there is only at the dawn of an increase in the OPR with the economic recovery, which would benefit the banks.

“As such, we remain optimistic and employ a fairly broad equity buy strategy in the first half of 2022,” he said.

After some earnings revisions this season, he now forecasts a two-year total earnings compound annual growth rate of 10.1% (2021 to 2023) for the sector.

“4Q21 (the fourth quarter of 2021) was a pretty decent quarter as it saw industry profit increase 42% year over year on a lower loan loss provision, but in decline of 3% quarter over quarter due to negative jaws (jaws ratio is a measure used in finance to demonstrate the extent to which a business entity’s revenue growth rate exceeds its revenue growth rate expenses, measured as a percentage), high net credit charges and bond write-downs.

“Overall, there were three earnings beats (Affin Bank Bhd, Alliance Bank Malaysia Bhd and Malayan Banking Bhd [Maybank]), three online (CIMB Group Holdings Bhd, Public Bank Bhd and RHB Bank Bhd) and two below (AMMB Holdings Bhd and Bank Islam Malaysia Bhd [BIMB]),” he said.

Chan expects sequential net interest margins to hold steady at current levels before contracting again due to deposit rivalry.

That said, this should grow when Bank Negara Malaysia raises the OPR later this year, he added.

He also expects loan growth to accompany the economic recovery.

“Separately, the gross impaired loan ratio is likely to rise, but we are not overly concerned as banks have made significant precautionary provisioning in FY20 (FY2020) and FY21 and , in our view, credit risk has been correctly assessed in by the market, looking at the NCC’s still high assumption applied for FY22 by us and the consensus (above the normalized run rate but below FY20 and FY21 levels),” he said.

For big banks, he likes Maybank (target price [TP]: RM9.40) for its strong dividend yield and Public Bank (TP: RM4.80) for its large potential leeway to carry out reversals of management provision coverage. For mid-sized banks, RHB Bank (TP:RM7) is favored for its high Common Equity Tier 1 (CET1) ratio and attractive price.

As for smaller banks, BIMB (TP: RM3.45) and Affin Bank (TP: RM2.35) are preferred.

“We like the former for its positive structural growth drivers and better asset quality, while the latter has special dividend potential after completing the divestment of its asset management arm,” he said. declared.

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