Further upside to banking stocks?

The rapid rise in the share prices of banking stocks over the past six months would have naturally caused investors to be cautious, yet some analysts believe they still have more legs on the upside.

In just six months, the Kuala Lumpur Financial Index has risen 60.53%, surpassing the FBM KLCI’s 44.12% gain. In comparison, the PLANTATION Index is up 36.55% from March and the CONSTRUCTION Index 44.97%.

Improved sentiments have generally buoyed stocks in the market, but it is apparent that a number of banking stocks have had their stock prices flying off the charts.

For example, trading at RM6.60, the country’s biggest banking group, MALAYAN BANKING BHD [], is up 84.65% from its low of RM3.57 in March. CIMB Group Holdings Bhd is up 82.33% from its low for the year in January.

AMMB HOLDINGS BHD [] has seen its share price rising 93.3% in seven months. Trading at RM2.24 in February, AMMB closed last Friday at RM4.33. EON CAPITAL BHD [] is up 95.15% at RM5.23 from its low of RM2.68 in March.

Given the huge jump in the share prices of these banking stocks, is this as high as they can get for now and investors should look to locking in profit? Some banking analysts don’t think so, in the belief that there is a further upside.

However, Kumpulan Sentiasa Cermelang Sdn Bhd’s director of research and fund manager, Choong Khuat Hock, believes any upside will be “limited”.

“The stocks have run up quite a lot. Looking at the price-to-book for some of the banks, they are trading at a level which is high for their respective historical range.

“I think a lot of people are assuming that the Malaysian economy will recover quite strongly. My personal belief is that the recovery could be a bit slow as we are dependent on exports and we haven’t seen a recovery in US consumer spending as yet,” he said.

Nonetheless, at the other end of the spectrum, some analysts’ optimism is driven by factors that include continuing improvement in asset quality and the current over-capitalised position of Malaysian banks.

“There is further upside looking at the sector as a whole. Consensus earnings estimates have been relatively conservative. A lot of loan loss provisions done by banks recently were pre-emptive in nature.
“Studying the banks’ actual non-performing loan (NPL) ratio for the second quarter of the year ended June, the average domestic absolute NPL was down marginally quarter-on-quarter and yet provisions were up.

“This shows the banks were pre-emptive in nature. Therefore, if the economy continues to show stable signs of recovery, the provision levels may come down and coupled with improving asset quality, there is an upside potential in terms of earnings,” said a banking analyst with a local research house.

“Also, loan approvals over the past few months have really recovered because of the accommodative interest rate environment and ample liquidity in the banking system. All this is setting the stage for an upside surprise going forward, coming from low expectations and a low base,” the analyst added.

The analyst’s view echoes the statement made by CIMB Group chief executive officer Datuk Seri Nazir Razak last week that the worst was probably over for Malaysian lenders and many banks would be able to trim some of their excess capital soon.

Analysts are starting to project higher dividends or even capital repayment from local banks next year, as the need to keep a huge buffer against potential writedowns and loan default has waned following signs of the economy turning around.

“Given that things are improving and depending on how things continue to unfold, there could be further capital management upside. Banks have greater flexibility to optimise capital structure given that asset quality continues to surprise on the upside and economy continues to show more sustainable signs of recovery.

“Banks can improve their return on equity by optimising their capital structure and also look at increasing their dividend payout. Banks have been very conservative in keeping a high capital position during the uncertain economic environment,” said the banking analyst.
The analyst added that most of the big-cap banks were trading at “mid-cycle valuations” at the moment.

“The smaller banks are still very cheap as they are trading at a single-digit PE (price-earnings ratio) on average. Normally, they are trading at 12 times PE,” the analyst noted.