Affin Research maintains Overweight on banks

by **hlk** Fri 23 Sep 2011, 20:10

KUALA LUMPUR: Malaysian banks’ earnings this year would continue to be driven by sustainable net-interest-income growth given continuous domestic credit demand and liquidity, non-interest income as well as lower credit cost, according to Affin Investment Bank Research.

The research house in a note Sept 23 maintained its overweight rating on the banking sector and said that banks remained a proxy to the domestic economic recovery, which was supported by both government spending under the 10 Malaysia Plan, the ETP and still buoyant consumer spending.

The research house picked CIMB, PBB, Maybank, RHB Capital, Hong Leong Bank and AFG as its stock choices in the banking sector.

Affin Research said although there was keen industry competition and high loan-to-GDP penetration rate of 100%, it continued to see upside potential in banking stocks price target due to new income streams from M&As, bank revenue diversification benefits through tie-ups with insurance companies and productivity gain from group transformation initiatives.

"We believe that Bank Negara Malaysia would continue to strike a balance between inflation and economic growth with an accommodative monetary policy stance, and this should not affect our loan growth forecast of +12% yoy in 2011," it said.

Affin Research said investors should focus on banks with good asset-liability management, loan-to-deposit (LD) ratio of not more than 90%, improving return on equity (ROE) generation and exposure to higher growth regional markets through tie-ups and subsidiaries.

Meanwhile, the research house Affin Investment Bank's economist is expecting Bank Negera Malaysia (BNM) to resume the normalisation of interest rates from 2QCY12 onwards with a potential hike of 50 basis points.

Although the interest rate hike is often perceived to be a sector catalyst, it does not think it would provide much boost to banks' earnings as net interest margins (NIM) improvement from the rate hike could be tepid owing to the rise in funding cost due to competitive pressure on loan yields.

“Based on our current real GDP growth forecast of 4.5% in 2011 and 5.0% in 2012, our banking sector earnings growth forecast are 9.1% 2011 and 13.5% 2012.

“There are however downside risks to these given the escalating external developments,” it said.