Banking - OVERWEIGHT - Bright spots for Responsible Finance them

Stock Name: AFFIN
Company Name: AFFIN HOLDINGS BHD

Research House: KENANGA

Price Call: BUY

Target Price: 4.30

Stock Name: BIMB
Company Name: BIMB HOLDINGS BHD

Research House: KENANGA

Price Call: BUY

Target Price: 2.90

Stock Name: CIMB
Company Name: CIMB GROUP HOLDINGS BERHAD

Research House: KENANGA

Price Call: BUY

Target Price: 8.50

Stock Name: HLBANK
Company 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 3^rd  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.  

Source: Kenanga