Hong Leong Investment Bank said the sector has a balanced risk-reward profile.
PETALING JAYA: The banking sector is inexpensive when stacked against its five-year mean pre-Covid price-to-book value (P/B), but remains pricey compared with its regional peers.
Hong Leong Investment Bank said this in a report, adding that the sector has a balanced risk-reward profile.
“We still employ a selective stock picking strategy. We only like banks that are trading less than one time P/B and less than 10 times price to earnings, along with positive catalysts that are not fully appreciated by investors,” it said.
“With these parameters, we only have two ‘buy’ ratings under our coverage – RHB Bank Bhd for its attractive yield of more than 6% and AMMB Holdings Bhd
for its five-year strategic plan,” it said.
It also said on the whole, it was “neutral” on the sector.
It noted that the sector’s quality was stable, considering November’s gross impaired loan (GIL) ratio was down month-on-month to 1.51% while the business segment fell three basis points.
“Going forward, asset quality is expected to stay stable, given robust economic conditions.
“In any case, we are not worried about any weaknesses as banks are better equipped compared with prior slumps and the large impaired loan provision built up over the past four years will act as robust buffer to cushion any spike in GIL ratio,” it said.
Interest spread also narrowed as the average lending rate fell while the three-month board fixed deposit (FD) rate decreased, it added.
In turn, interest spread compressed six basis points, it said, adding that it sees fourth-quarter 2024 net interest margin slipping, given seasonal FD competition that typically kicks in October to December.
RHB Research is maintaining its “overweight” call on the banking sector with top picks being AMMB, Alliance Bank Malaysia, CIMB Group Holdings Bhd and Hong Leong Bank Bhd.
It noted Bank Negara’s November 2024 banking system statistics saw steady loans growth which outpaced deposits growth.
“Asset quality remained healthy with system GIL continuing to decline across most sectors.”
The research house also said the industry’s capital ratios appear adequate – Common Equity Tier-1 and total capital ratios remained stable at 14.4% and 17.9% respectively. Elsewhere, small medium enterprise (SME) loans in October continued its strong loan growth trajectory while the SME GIL ratio has been broadly stable at 2.99%, it noted.
“We maintain our sector rating as we think the ‘stable’ outlook for Malaysian banks under our coverage provides investors with a defensive shelter.”
