Stock Name: AFFINCompany Name: AFFIN HOLDINGS BHD| Research House: KENANGA | Price Call: BUY | Target Price: 4.30 |
Stock Name: BIMBCompany Name: BIMB HOLDINGS BHD| Research House: KENANGA | Price Call: BUY | Target Price: 2.90 |
Stock Name: CIMBCompany Name: CIMB GROUP HOLDINGS BERHAD| Research House: KENANGA | Price Call: BUY | Target Price: 8.50 |
Stock Name: HLBANKCompany Name: HONG LEONG BANK BHD| Research House: KENANGA | Price Call: HOLD | Target Price: 10.90 |
Smaller banks are trading at a substantial discount to theirpeers despite their improving balance sheets. Most banks have been rerated over2009-2011 as their share prices have climbed 102% with positive consensus EPSrevisions. Nonetheless, with banks are now trading at 1.8x forward with average16.3% ROE, this makes the bigger banks seem more expensive as compared with the smaller banks, which are only pricedat 0.9x forward P/BV (a 50% discount) despite an estimated 10.3% ROE. As such, we believe it is time to visit the smallerbanks to find the potential dark horse winners for 2012/13.
Responsible Lendingis a key theme agreed by the consensus in 2012. More responsible policyresponse will reduce systematic risks and thus should benefit banks' asset quality.As such, we reckon that the domestic banking system should continue to see the multi-yearof balance sheet enhancement.
The banks' improvingasset quality remains as our central case. The increased trust in banks'asset quality and their continuous improvement in the same are likely to support banks' earnings growth inthe near future with lower credit cost. We reckon that BIMB and AFFIN will be the keybeneficiaries for this theme. In a nutshell, we see small banks being reratedin 2012/13 as their valuation could rise closer to their bigger peers' currentvaluations and their improving asset qualities could provide the trigger forthis. We will initiate coverage on AFFINand BIMB, driven by the following catalysts:
- Responsible Finance. Bank Negara Malaysia (BNM) has issued a new set of guidelines toensure household debts do not pose a threat to the stability of the financialsystem. More policy responses willreduce systematic risk and benefit bank valuation multiples. The progress ofcontinuous improving asset quality is now in motion and will be long lasting inour view, with positive consequences for banks' earnings.
- The two banks above should benefit from thesustainable downtrend of non-performing loans that we have witnessed thus far.Furthermore, due to the perception of weaker asset quality, the tighterregulations that BNM imposed of late i.e. 70% LTV cap for 3rd mortgages should in a way improve their assetquality going forward.
- Hence, for 2012, we are likely to see the twobanks achieving a conservative earnings growth rate of 5%-6% on the back of9%-10% growth in loans. We reckon that our current estimates areconservative judging from their businessvolumes, fees growth and credit qualities. As such, we believe that they arepoised for upward revisions over the next 12-24 months. We believe the twobanks would be able to achieve healthy profit growth, with provisioningcharges continuing to drop towards andpossibly below their normalised levels.
- Pursuant to improving asset qualities and aresultant lower credit costs, their FY12/13 Return on Equity (ROE) of 10.3%would be lower than the bigger banks' ROE rate of 13%-25% while also trading atundemanding valuations (of 0.9x P/BV) (see Figure 1).
We believe the two dark horses above share a commoncharacteristic i.e. they have decent and liquid balance sheets (reasonable RWCR and low L/D ratio) but generallysub-par in ROAs and ROEs (in part due to their low leverage levels). Thus far, investors have yet to be convincedby their recent management changes or new strategies, perhaps due in part totheir previously less impressive historic track records in showing improvinggrowth and profitability. In addition, they also need some critical executionrelating to regional growth and M&As may be needed and central to themrealising their full potentials. Still, our valuation model suggests that smaller banks are currently tradingwell below the overall banking stocks' price multiple ranges. These valuations are likely to play catch-up due to reasons mentioned above.Hence, we strongly believe that AFFIN and BIMB could be the dark horses amongthe banking stocks.
AFFIN: At just 0.7xBV, it deserves more.
We believe AFFIN's potentially higher credit risks aresomewhat priced in by the discount in its valuation, which is already based onmore conservative earnings and credit cost assumptions. With a reasonable 9%ROE and its undemanding valuations (FY13E:10.2x PER, 0.7x P/BV), there is room for its earnings to improve. We are initiating coverage of AFFIN with an OUTPERFORM rating and a target price ofRM4.30.
A tough operating environment had led to previous consensusearnings and price target cuts. However, we believe its current valuation atFY13 P/BV multiple of 0.7x with an estimated ROE of 9.1% is overlypessimistic.
BIMB: Uniquelypositioned for more growth.
We believe BIMB's unique footprint translates into acompetitive edge in funding as well as positioningfor growth as BIMB appears ideally positioned to capture the fastest growth in Malaysia's Islamic financingarea. (Islamic financing has grown at aCAGR of 20% since 2005.) It has a very liquid balance sheet (50% L/F ratio, liquid assets at 40.5% of assets) and the highest proportion of CASA deposits (43%) should drive faster NIMexpansion vs. other larger banks as balance sheet gearing and financings growfaster.
We are initiating coverage with an OUTPERFORM rating and aTP of RM2.90. Its unique footprint translates into a competitive edge. Itscheap funding and long term positioning for growth in Islamic areas also makeit an interesting financial stock to invest in with its current undemanding valuations.
OVERWEIGHT. As a result of our initiation on AFFIN and BIMB with an OUTPERFORM rating for each and coupled with our recent upgrade in CIMB rating to OUTPERRFORM (TP: RM8.50), we are now raisingour sector rating to OVERWEIGHT from NEUTRAL. Following our upgrade of HLBANK(TP: RM10.90) from UNDERPERFORNM to MARKET PERFORM, we have none outstandingUNDERPERFORM call in our banking stock coverage.
