Tuesday, 17 January 2017

(The Star) Banks back in vogue

Banking sector expected to outperform the market once again in 2017
PETALING JAYA: Although interest rates are not likely to go up anytime soon in Malaysia, it has not stopped some form of renewed enthusiasm for the banking sector.
The Kuala Lumpur Finance Index (KLFIN), which tracks the performance of banks, is up more than 2% since Nov 8 when Donald Trump was elected as the new president of the United States.
On a comparison basis, the benchmark FBM KLCI has remained flat over the same period.
Last Friday, the KLFIN hit a nine-month high while for the whole of 2016, the KLFIN outperformed the benchmark index by 4.6%.
Observers reckon local sentiment is being helped by a spillover in optimism from the US banking sector, which is set to do better in view of rising interest rates and a less regulated environment as promised by Trump.
Specifically, the expectation of a rising US interest rate environment would tend to discourage banks from giving discounts on their loans.
This is because consumers and corporations themselves will tend to chase for loans with the view of locking in their borrowing costs if they anticipate interest rates to rise in the short term.
At the same time, financially strong corporations could also undertake deleveraging exercises to reduce their debts.
“Whatever the case, banks will benefit from rising rates. Their earnings have been compressed for the longest time due to ultra-low interest rates,” said a banker.
In the US, Wells Fargo & Co, JPMorgan Chase & Co and Bank of America have all started to report good results, sending the S&P 500’s banking sub-sector to its highest level since February 2008 last Friday.
Having said that, not all fund managers here are positive on the sector yet.
“I am not positive on the sector yet, but I am buying selectively because banks being part of the index can’t really be ignored,” Danny Wong, fund manager at Areca Capital, said.
Wong, who manages some RM700mil in funds, said he had accumulated some CIMB Group Holdings Bhd shares following the banking group’s massive cost-reduction programme over the past couple of years, and also has some Malayan Banking Bhd (Maybank) shares as part of Areca’s strategic holdings.
“But for most banks, I need a couple of quarters more to see how they perform.”
Thomas Yong, fund manager at Fortress Capital Asset Management, said he would still be staying away from banks for now.
Banks both here and in the region have generally been hit in recent times by a confluence of factors, including a slowing economy, weak commodity prices and weak stock markets.
Most hit were lenders with exposure to Indonesia due to the fall in commodity prices and steep rise in interest rates there that caused a spike in bad loans.
As such valuations of banking stocks have come down in the past few years, with many financial institutions trading at below one times book value, which means that their intrinsic value is much higher than their liabilities.
In good times, banking transactions are generally done at between 1.5 to two times book value.
Valuations-wise, the five largest banks in Malaysia currently trade at a price-to-book (P/B) ratio range of between 0.8 times and 1.27 times, with one trading at a P/B ratio of around 2.3 times.
Generally, a P/B ratio of less than one is thought of as compelling enough for investors to buy in.
Meanwhile, in its report to clients yesterday, UOB Kay Hian said as the market here begins to price in the upcoming 14th General Election (GE14), the larger-cap banking stocks may be seen as indirect proxies to improved election-driven market sentiment.
On Maybank specifically, the research house said drawing parallels to GE13, it is clear that Maybank’s share price could continue to outperform in the run-up to GE14.
“Assuming valuations were to stretch towards the historical five-year mean P/B of 1.40 times (lower than the 10-year mean of 1.80 times), we believe a positive election-driven sentiment could drive the share price to the RM9 level,” it said.

CIMB Research in a report yesterday predicted a better year ahead for the financial sector. It said that although loans growth is expected to be weak at between 5% and 6% this year, the margins of banks are expected to improve.