The banking sector is not expected to outperform the market this year amid the backdrop of a flagging economy, according to CIMB Research.
Analyst Winson Ng said in a report that the sector would be depressed by a slowdown in loans growth, weaker investment banking income and higher credit costs.
“Also, cyclical stocks like banks will be out of favour as investors have turned risk-averse in the light of external risks,” the research house said.
The KL Finance Index (KLFIN), which is a composite of financial stocks on Bursa Malaysia, gave a poor showing in 2011, slipping 1.1% for the year and underperforming the benchmark 30-stock FTSE Bursa Malaysia KL Composite Index by 1.5%.
“The poorer economic climate will make it hard for banks to sustain the 12%-13% loans growth racked up in the past two years. The pace is set to soften to 9%-10% in 2012 as small-to-medium enterprises loans growth will be hurt by weaker exports to Western countries and consumer loan momentum is expected to be crimped by Bank Negara's tightening measures,” CIMB Research said.
It is projecting a slower net profit of 14% for banks this year versus the 15%-27% growth achieved in the past two years. Similarly, it expects a deceleration in growth for net interest income to 7.5% this year against 12.5% last year, non-interest income to 16.1% from 19.1%, and a 7.4% increase in loan loss provisioning.
Despite the gloomier outlook, CIMB Research has maintained a “neutral” call on the banking sector, citing the financing opportunities from the Economic Transformation Programme (ETP) and banks' undemanding valuations as bright spots.
Meanwhile, it said Alliance Financial Group Bhd was the largest gainer last year, rising by almost 30% against the KLFIN. It added that this was a reflection of the market's confidence in its CEO Sng Seow Wah's ability to revive the bank's earnings growth in the near term through his strategies for fee income expansion.
However, RHB Capital Bhd, AMMB Holdings Bhd and CIMB Group Holdings Bhd saw their share prices tumble 12%-15% on concerns over their investment banking income, it said.
In view of the tougher economic conditions, CIMB Research said it would advise investors to take refuge in big banks like Malayan Banking Bhd and Public Bank Bhd, which offered superior defensive properties.
“Maybank's dividend yield of over 5% is the highest among the Malaysian banks.
In addition, it is set to benefit the most from the implementation of ETP projects, which will help to lift income from its investment banking, commercial banking and insurance businesses.
“As for Public Bank, its fundamentals are undoubtedly the best among the local banks, reflected by the enviable return-on-expenditure in the mid-20s, lowest gross impaired loan ratio of below 1% and best operating efficiency. These qualities will help the group outperform other banks during the economic downturn this year,” it said.
To remain resilient in the current risk environment, the research house said banks had shifted their focus from rapidly expanding their loan books over the past two years to safeguarding their asset quality.
This would involve tightening the loan approval and loan monitoring process, lending selectively to reduce exposure to segments that rely heavily on exports, and continuous extraction of value from overseas operations, mainly in Indonesia and Thailand, by improving operating efficiency and cross-selling, it said.