Banking stocks' rally, how much higher would it climb?
KUALA LUMPUR (Sept 6): Banking stocks are among the best performing counters on Bursa Malaysia of late as the positive sentiment on banking stocks is also aided by the good quarterly earnings due to lower provisions compared with a year ago.
Furthermore, some banks have declared dividends in last month's result season.
Banking stocks, the proxy to recovery play, could climb higher on the back of anticipated economic recovery due to the reopening of the domestic economy that has been in the lockdown for over three months, according to analysts.
Since August, AMMB Holdings Bhd's share price has climbed 15.2%, Alliance Bank Malaysia Bhd (11%), CIMB Group Holdings Bhd (9.73%), BIMB Holdings Bhd (4.75%), Malayan Banking Bhd (Maybank) (4.13%), RHB Bank Bhd (4.02%), Hong Leong Bank Bhd (3.84%) and Public Bank Bhd (3.28%).
After the recent rally, however, the question remains as to how much headroom there is for the banking stocks.
Have the current share prices already factored in the good news moving forward?
Hong Leong Investment Bank (HLIB) analyst Chan Jit Hoong told The Edge that it is not "100% rosy" and there are still uncertainties before us. However, the reopening of the economy definitely helps, he said.
"That said despite the share price run-up, valuations are still palatable. Currently, the sector is only trading at -1 standard deviation (SD) to its five-year price-to-book value.
"Recall, back during the Great Financial Crisis recovery phase, it rallied 3 SD notches and peaked at +2 SD. The run-up we are seeing right now is only by 1 SD notch, implying there could be further potential upside.
"The sector's risk-reward profile continues to skew favourably to the upside as most negatives have been considered by the market. In our opinion, Covid-19 woes will likely fizzle out in 2022 while the state of the economy and banking sector will only get better in time. Furthermore, valuations are undemanding and there is ample liquidity in the market," Chan explained.
For the big boys, Chan prefers Maybank with a target price (TP) of RM9.40 for its strong dividend yield, and Public Bank (TP of RM4.50) for its defensive qualities, over CIMB with a TP of RM5.10.
For mid-sized banks, RHB Bank (TP of RM6.85) is favoured more than AMMB (TP of RM3.00) as the former has a higher common equity tier 1 (CET1) ratio and also larger fair value through other comprehensive income reserves to buffer against potential yield curve volatility.
For small-sized banks, BIMB (TP of RM4.80) and Affin Bank Bhd (TP of RM2.15) are preferred over Alliance Bank (TP of RM2.80). HLIB noted BIMB has positive long-term structural growth drivers plus better asset quality, while Affin Bank could possibly unlock asset values.
Bank Islam Malaysia Bhd economist Adam Mohamed Rahim commented that the prospects for the banking sector appear bright despite the headwinds posed by the ongoing pandemic in the country. The government has further relaxed restrictions on economic sectors for fully vaccinated individuals and workers.
Adam opined that the reopening of the economy will help drive lending activities as more businesses resume operations, there will be demand for fresh funding.
He noted once businesses are able to operate on full capacity, banks' borrowers would start generating cash flow for debt repayments.
Rakuten Trade head of equity sales Vincent Lau concurred while noting that there is still room for growth for the banking stocks as he foresees the modification loss as a result of loan moratorium is going to be less impactful compared with in the previous year.
Lau commented that banks' earnings performances have been better than expected as the impact of modification loss was not as bad as many thought it would be. He expects the impact of the latest six-month loan moratorium to be even milder.
"Going forward, banking stocks have room to go up, especially the bigger banks like Maybank. Furthermore, you have the dividend to fall back on as some banks are declaring high dividends.
"The stock market is six to nine months ahead or may even be beyond 2022 for the recovery. There is still upside for the banks ahead. It's not like the banks are trading at a rich valuation," he said.