We maintain our OVERWEIGHT call on the banking sector. The industry is strongly supported by the CY24 domestic GDP target to close at 5.0% with system loans growth to outpace at 5.5%-6.0%, i.e. a 1.2x multiplier. We note that BNM’s decision to keep OPR stable at 3.00% stood well amid regional centrals expecting to trim on theirs, enriching sentiment for Malaysian banks. Checks against sector ROE/PBV also indicates further appreciation could be at hand, which could come in the form of tightening betas across banking valuations. Further, readthrough of foreign shareholding levels indicate that despite strong buy-ins in Aug 2024, most banks are still below their respective peaks, suggesting the possibility of further accumulation. These may spell the long overdue uplift of laggard, albeit high-quality names, being our 4QCY24 Top Picks namely: (i) PBBANK (OP, TP: RM5.10), and (ii) HLBANK (OP, TP: RM27.40), and (iii) RHBBANK (OP, TP: RM7.55) which holds strong regard as a dividend pick, especially with asset quality issues resolved.

Solid GDP landing to keep prospects firm. With an in-house CY24 GDP target of 5.0% (CY23: 3.7%), we stay convinced that industry loans growth would end on a stronger note at 5.5%-6.0% (CY23: 5.3%) with demand for both household and business loans exhibiting higher appetite. Opportunities persist in sustained mortgage markets while SMEs leverage on a more productive operating climate (particularly for service-based industries and construction-related sectors). Near-term risks may come in the form of further fuel subsidy rationalisation which could bump up daily discretionary expenses and cost of business. While this pends further clarity from the government, an appreciating MYR would cushion imports and consumer sentiment in the nearterm.

Steady state OPR the right call. BNM previously stated that decisions to adjust to OPR will prioritise domestic performance with its headline inflation target of 2.0%-3.5%. Our in-house expectation is for OPR to remain stable throughout CY25. On the flipside, regional central banks in developed and developing markets have progressively cut their respective rates over subsequent quarters, with Bank of Japan being an outlier as tightening was needed to curb inflation risks. As of Sep 2024, we highlight the downside adjustments anticipated by the street’s economists:

• US Fed Funds Rate @4.75%-5.00%, Dec’25: 3.50%-3.75%
• UK Base Rate@ 5.00%, Dec’25: 3.60%
• Indonesia 7-day Reverse Repo@ 6.25%, Dec’25: 5.20%

Staying independent of movements in global monetary policies has bode well for Malaysia banks, being viewed as more stable picks for financial sector position seekers and greater foreign participation, where we saw an increase in foreign shareholdings in the large cap names. Further analysis presents that most recent levels, up to Aug 2024, are still below the 3-year peak for most banks (refer to Exhibit 4).

Between 1 Aug 2024 till our cut-off date (20 Sep 2024), the Bursa Finance Index (KLFIN) saw an 8% uptick with an average share price increase of 7% between the 10 listed banks. This also provided support for the KLCI to reach c.1,670pts (+3%). Top gainers during this period were CIMB (+14%), AMBANK (+14%), BIMB (+11%) and PBBANK (+10%) (refer to Exhibit 5).

Sector valuation re-rating has more in the works.In Exhibit 6 below, we present our charting on industry ROE/PBV (i.e. expected ROE for every 1.0x PBV; the higher the rating, the more undervalued) trends where we found that current 1-year average lingers at c.9.5% average with Aug 2024’s spike in foreign investor interest bringing it down to 8.5% for a sector PBV of 1.2x. Given that the banking sector is poised to see previously mentioned tailwinds stretch out in the near-term, we are optimistic of further improvement to industry valuations where a 10-year average ROE/PBV is marked at c.8.0%. Furthermore, previous cycles where industry ROE/PBV stood above 8.0% persisted for 20 months between Mar 2019-Oct 2020 with a similar reflection on the current >8.0% streak on 22 months, so we are watching for a due re-rating.

We opine an industry revaluation is also timely, as we had also highlighted in our 4 Sep 2024 report, “2QCY24 Report Card: Recalibrating Optics”, the average banking industry Beta is forming at 0.9x. This is against an observed 1.0x 5-year Beta across most banks which looks to move closer to their more immediate 1-year Beta range of 0.7x-0.8x.

Assuming the correction to 8.0% courses gradually into CY25, our ROE projection of 11.0% (mostly supported by KLCI members) could translate to a Dec 2025 PBV of 1.38x to suggest a positive re-rating in the process, potentially translating to a further 20% appreciation from 20 Sep 2024’s KLFIN closing of 19,689 pts. This does not appear farfetched given that past 11.0% ROE readings had also yielded sector valuations of c.1.4x in the past.

Downside to NIMs to re-emerge during 4QCY24 reporting season. From 2QCY24’s reporting, only a handful of banks continued to show further compression to NIMs, albeit slightly on a larger focus on lower-yielding mortgage products. While most players credited sequential improvements to margins, thanks to a more rationalised deposits market, we opine pains will peak up again, no thanks to seasonal year-end deposit rate competition as banks typically compete to secure relatively cheaper funds for deployment for the coming year. Between our coverage, only MAYBANK and PBBANK hint for a net compression in CY24 while the others may see their gains moderate.

With our view for OPR to remain stable at 3%, the banks will have a better position to recalibrate their profit spreads to revitalise NIMs in CY25. However, we do not anticipate wide recoveries (staying in the range of +5 to +10 bps) as competition in asset yields may remain dynamic.

Maintain OVERWEIGHT on the banking sector. Despite the recent run-up in banking stocks, we believe our abovementioned findings provide merits for more upside potential, backing our wide recommendation roster of seven OUTPERFORM calls. Among them, we continue to believe that laggards could see the greatest appreciation, being: (i) PBBANK, (ii) HLBANK and (iii) RHBBANK. Commonly, these banks reflect foreign shareholding levels firmly below recent peak (see Exhibit 4). With regards to PBBANK and HLBANK, their leading asset quality (GIL <1.0%) offer firm cushion against the potential degradation in the industry as risk appetite expands with better economic prospects. Meanwhile, RHBBANK offers leading dividend yields (c.7%) which could attract yield seekers in spite of modest loans growth targets (4%- 5%), suggesting the possibility of greater upside should they be able to leverage of the same wider economic growth.

Source: Kenanga Research - 2 Oct 2024