Banking sector an ‘overweight’

September 13, 2017 | By | Reply More

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PETALING JAYA: Affin Hwang Capital Research has given the banking sector an overweight rating as favourable domestic trends, infrastructure projects in the pipeline and an accommodative monetary policy are expected to steer earnings going forward.

“We maintain our sector overweight rating. Favourable domestic demographic trends (driving consumption and housing needs), ample infrastructure projects in the pipeline and an accommodative monetary policy (2017 OPR expectation: 3.0%) should continue to drive earnings,” the research house said.

According to Affin Hwang there has been no negative surprises, as the banking sector’s earnings for the second quarter was in line with its expectations as Net Interest Margin (NIM) has been holding up while overall credit costs were sharply off the peak in 2016.

The key risks identified are in relation to operating expenses, higher overheads, new non-performing loan formation, NIM compression, higher funding costs, and weaker loan growth.

The banking and financial sector saw a 18.7% jump in net profit from the previous year’s second quarter to RM5.7 billion, while normalised profit was flat at RM5.8 billion.

Affin Hwang said this was very much in line with its full-year net profit forecast of RM24 billion.

CIMB, Maybank and RHB which were not reporting favourable pre-tax profit for the past one year has seen a rebound in the second quarter.

Affin Hwang also upgraded its rating for both Ambank (Price target (PT): RM5.20) and Hong Leong Bank (PT: RM17.00) from Hold to Buy with higher price targets.

The research house is of view that Ambank’s stocks upside potential appears to be attractive at this juncture, following the selldown.

The aborted merger between Ambank and RHB looks to continue to be pushing its share price on a downtrend.

Nonetheless, Affin Hwang is positive that the new management line up would have better execution to achieve its Top 4 Agenda in wholesale, Small and Medium Enterprises and retail banking.

“Year-to-date loan growth stood at 2%, and we believe it will be on track to meet or outperform our FY18 forecast of 4% y-o-y. GIL ratio remained steady at 1.88% on a q-o-q basis while impaired accounts are well-collateralised. Q1’18 CIR stayed flat at 56.3% vs Q1’17,” Affin Hwang said on Ambank.

As for Hong Leong, its funding cost pressure is expected to ease through higher current and savings account growth and repayment of a US$300m (RM1.3 billion) senior bond. The bank is seen as being poised for stronger growth in FY18-20 on the back of ample balance sheet liquidity.

It also expects Hong Leong’s gross to deposit ratio (LDR) to increase from 80.6% to 82%.

“Sound asset quality remains another key strength coupled with its 20%-owned Bank of Chengdu which we expect to contribute to almost 14% of pretax profit by FY19E from 12% in FY17E,” it added.

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