Maybank, CIMB still have attractive valuations

by **Cals** Tue 08 Apr 2014, 12:56

Business & Markets 2014

Written by RHB Research

Tuesday, 08 April 2014 09:40

Banking sector
Maintain overweight: Public Bank Bhd’s strong share price performance over the past week implies that its valuations are now relatively less attractive compared to its peers.

We think investors should take the opportunity to switch out of Public Bank into liquid, large cap peers such as Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd, which still have attractive valuations and offer better leverage to the Economic Transformation Programme and capital market activities. a Public Bank’s share price surged 8.6% last week. We believe this was mainly driven by its corporate exercise to merge its foreign and local shares (the merged shares will trade beginning April 16), as this will lead to an increase in weighting of certain global indexes due to a higher free float factor.

Currently, only foreigners holding Public Bank’s PBB-F shares (30% of share capital) have voting rights and this has capped the share’s investability weighting in FTSE and MSCI indices. Note that FTSE has confirmed that the merger will raise Public Bank’s investability weighting to 80% from 30%.

However, domestically, we understand the exercise will not impact Public Bank’s weightage in the FBM KLCI.

Following its share price rally, Public Bank now trades at 16.7 times 2014 price-earnings ratio (PER) and 3.2 times 2014 price-to-book value (P/BV) compared with its long term average PER of 15 times and P/BV of 3.1 times.

While portfolio rebalancing activities by global funds may see Public Bank’s share price remaining elevated, fundamentally we think its current valuations are less attractive given its weaker growth prospects (10-year net profit compound annual growth rate of 15.5% versus 2014F’s 7.5%) and structurally declining return on equities (ROE) (2014F: 20% versus 10-year average of 22%).

Investors who need to stay invested in large cap, liquid banking stocks may wish to consider switching out of Public Bank into Maybank or CIMB.

The valuation gap between Public Bank and Maybank/CIMB has widened further and is now significantly above long-term averages. Public Bank is currently trading at 2014 PER and P/BV premiums of 33% and 88% respectively over Maybank, versus the 10-year average PER and P/BV premiums of 10% and 67% respectively.

Relative to CIMB, the PER and P/BV premiums are currently 37% and 100% respectively, versus the 10-year average PER and P/BV premiums of 8% and 73%.

We think the valuation gap should close, especially given that the ROE spread between Public Bank and Maybank/CIMB has narrowed in recent years.

We do not discount the possibility of Public Bank’s strong share price performance sparking interest in the sector.

We continue to like banks that offer strong leverage to corporate lending and capital market activities, for example Maybank and CIMB. We also like Hong Leong Bank Bhd for its growth prospects now that its post-merger restructuring activities are largely done. — RHB Research, April 7

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This article first appeared in The Edge Financial Daily, on April 8, 2014.