Kenanga Research maintains 'overweight' call on banking sector

KUALA LUMPUR, April 12  -- Kenanga Research has maintained its “overweight” call on the banking sector, continuing to view the sector as a sound proxy of the impending economic recovery following the roll-out of COVID-19 vaccination efforts.

The research firm said its optimistic outlook for the sector was anchored by the in-house projection of a 6.5 per cent Gross Domestic Product (GDP) growth for 2021, no further downside to the Overnight Policy Rate, easing credit cost from heavy pre-emptive provisioning in 2020, and a potentially extended low cost-to-income ratio environment.

“Our view for 2021 GDP growth was in line with Bank Negara Malaysia’s forecast of 6.0 to 7.5 per cent.

“Even if loans and net interest income growths remain tepid and vaccination progress is slower than expected, we believe banks could continue to yield earnings growth, having implemented leaner cost structures amid the tight operating environments during the height of the Movement Control Order (MCO),” it said in a sector update.

Kenanga Research also noted that with most impairments being frontloaded in the fourth quarter of 2020, it anticipated any further provisioning this year to be milder.

However, it said that despite the consensus for economic outlook being skewed towards some degree of recovery, year-to-date institutional investors had taken a cautious stance on the financial sector and had been reducing such positions.

“Foreign investors have also shown less favour towards our banks but this has been a prevailing trend since 2019, possibly as Malaysia is perceived to be a dicier bet on bureaucratic factors as well as COVID-19 impact.

“That said, we believe there is little cause for concern as share prices and valuation levels for the sector have remained relatively stable that could help propel a stronger upward trajectory when these investors return,” the research house said.

In 2019 and 2020, institutional investors accumulated stocks in the financial services industry and added RM8.7 billion worth to their portfolios, although some hiccups were seen during the COVID-19-induced MCO, it said.

However, Kenanga Research said recent findings pointed out that the same basket of stocks was being de-institutionalised with year-to-date net selling of RM1.4 billion.

On the flipside, it gathered that foreign investors had constantly been net sellers which was truly market-wide at the height of the US-China trade tensions during the Donald Trump presidency, along with uncertainties in the domestic political climate.

Among the research house's top picks for the sector is Maybank, which is favoured for its strong dividend yield potential (seven to eight per cent) and return on equity prospects. It has made an “outperform” rating on the bank with an upgraded target price (TP) of RM10.60 (from RM8.75 previously).

Another top pick is RHB Bank Bhd (“outperform” call with TP of RM6.25), which commands an industry leading common equity tier-1 (CET-1) reserve of 16.2 per cent that enables greater allowance to implement capital management strategies.

-- BERNAMA