Alliance Research maintains Overweight on banks

KUALA LUMPUR: Alliance Research is maintaining its overweight recommendation on the Malaysian banking sector and has Hong Leong Bank as its top pick.

It said on Friday that although the January-March earnings registered by most banks were largely within its expectation and market consensus, it believed that earnings may not be reflective of the potentially higher earnings anticipated from succeeding quarters.

Alliance Research said the latest Q1, 2012 earnings had not yet factored in contributions from the upcoming Economic Transformation Programme (ETP) related business loans and potential upside in non-interest income.

"As such, we maintain that consensus earnings for banks in 2012 remain conservative, which provide room for positive earnings surprises," it said. The research house said loan loss provisions for most banks had been trending down, with improving asset quality and the removal of minimum 1.5% collective assessment effective January 2012.

"We are positive that selective banks such as Affin and CIMB that have suffered from large loan loss provisions over the past few years, could write back part of their provisions going forward," it said. Alliance Research said a significant portion of ETP related business loans would be bridging loans to companies to bridge the time gap between when companies need financing to implement the projects, and when funds from new bond issuance are secured.

It noted that due to the lumpy, fast disbursement and repayment nature of ETP related corporate loans, it expected domestic banks benefiting from such ETP related business loans could experience volatility in their loan books in the quarterly reporting season. The research house said it was also altering its expectation of the banks' net interest margins (NIM) prospects.

However, it cautioned despite bottoming interest margin in selective loan segments, NIMs of domestic banks might still see structural decline due to loan replacement cycle.

Under this cycle, high yielding loans acquired in the past few years were repaid and replaced by disbursements of lower yielding new loans disbursed recently. "We have adjusted our earnings forecast for the banks under our coverage in their respective Q1, 2012 result write ups. Despite the structural decline in NIMs, we do not see major downside risks to our earnings forecast since they are mainly mitigated by the (1) upcoming ETP related loans, (2) upside in non-interest income, and (3) continued lower loan loss provisions," it said. Commenting on the outlook for Hong Leong Bank, it said the group's earnings would remain resilient despite the heightened external risks.

"We also believe that its low foreign shareholdings (7.8%) could mitigate the stock from heavy sell down in a temporary risk-off environment, but provide room for further upside to its share price in a risk on environment," it said.