Maybank Research: Banking sector valuations still attractive

KUALA LUMPUR: Maybank KE Research is maintaining its Overweight recommendation on the Malaysian banking sector with a Buy on AMMB, RHB Capital, BIMB and Hong Leong Financial Group (HLFG).

It said on Thursday banking sector valuations were still attractive relative to the market as its basket of companies are trading at a 13% to 16% discount to the FBM KLCI.

Maybank Research said this was on a forward price-to-earnings ratio (PER) basis while offering faster earnings growth of 8.4% for 2013 (KLCI: 6.1% on-year), 10.3% for 2014 (KLCI: 7.6%).

"Relative to regional peers, valuations are still at a slight premium but this premium has narrowed significantly.

"The Bursa Malaysia Financial Index (KLFIN) still lags its peers on a year-to-date basis but the stable growth of the sector with the ETP as an economic catalyst, coupled with still attractive dividend yields, provide sector re-rating impetus," it said.

The research house Q1, 2013 was a fairly soft quarter with earnings growth tamed by higher overheads and credit costs.

"While core operating income rose at a decent pace of 9% on-year, negative JAWS persisted while credit costs rose, resulting in core net profit rising just 2% on-year," it said.

According to Wikipedia, the jaws ratio * is a measure used in finance to demonstrate the extent to which a trading entity's income growth rate exceeds its expenses growth rate, measured as a percentage.

Maybank Research said annualised loan growth for the Big Six banks was relatively sedate at 9% due to the drag from corporate loans.

Loan momentum should however pick up. With just 11% of RM212bil worth of committed ETP projects actualized as at end-2012 and only 29% of Petronas' budgeted capex of RM300bil from 2011-2015 realised, there was still much work ahead, particularly with the 13th General Election out of the way.

"We see stable consumer loan demand and faster corporate lending contributing to domestic loan growth of 10.7% for the year," said Maybank Research.

* JAWS ratio = Income Growth Rate - Expense Growth Rate)

The JAWS ratio is significant in that a larger positive value demonstrates that a trading entity is effectively generating more income over time than it is generating expenses, thereby potentially increasing its profitability, and profitability growth rate.

The ratio may also be a negative percentage, which should be a cause for concern for the owners / management of a trading entity as this will over time result in eroded profitability. -