“Banks have rebounded by 19%-79% year-to-date. But judging by past performance, where they rebounded by more than 200% after the 1997/98 recession, we expect more upside to their share prices,” said Nomura.

“Supported by an economic recovery and an earnings upgrade (only four months so far), banks would continue to outperform despite recent gains,” it added.

Nomura has raised the banks’ earnings estimate by an average of 15% for financial years 2010 and 2011. With an economic recovery on track and stock markets rebounding, Nomura expects banks to start lending again.

It said loan growth had already picked up strongly in July, driven largely by the housing and corporate sectors. Loan approval/application trends have consistently been picking up, pointing to a stronger 2010.

“Like the Street, we were also overly bearish on Malaysian banks’ earnings. With gross domestic product (GDP) growth contracting sharply at 6.2% (the slowest pace in 10 years), from 4.7% in 3Q08, we had expected credit costs to hit between 82 and 115 basis points,” said Nomura in a research note.

“As it turned out, domestic credit conditions remained resilient. Our earlier base case of sharply higher credit costs is not playing out. Given the low level of NPL formation, we think charge-off rates are more likely to surprise on the downside,” it noted.

According to Nomura, the NPL statistics show RM1 billion improvement despite a 6.2% contraction in real GDP growth in 1Q this year. During the 1997/98 financial crisis, NPL jumped RM10 billion in 4Q97 and grew an average of RM4.5 billion per month until 3Q98. Similarly, during the 2001 recession, NPL rose by RM4 billion while GDP growth decelerated to 1.5% in 1Q01.  

Malayan Banking Bhd (Maybank), whose share price has gained about 44% so far this year, is Nomura’s top pick among the large capitalisation counters and Alliance Financial Group Bhd (AFG), which has gone up 31% year-to-date, is its top small-cap pick.

Meanwhile, AMMB Holdings Bhd, which has soared 74.5% year-to-date, remains its high-beta banking pick, benefiting from a benign NPL environment and recovering economic prospects. Public Bank Bhd is also on Nomura’s buying list together with Genting Bhd, Berjaya Sports Toto Bhd, Tanjong plc and DiGi.Com Bhd.

Nomura said that with banks accounting for about 36% weighting of its stock coverage universe; the upgrade in banks’ earnings estimate as a result lifted its 2010 market earnings per share growth forecast by 3.1 percentage points to 9.9%, versus 13% for consensus.

The report pointed out that after the 1997/98 crisis, the earnings upgrade cycle lasted for about 18 months. After the burst of the dotcom bubble in 2001, the earnings upgrades went on for 13 months. “Judging from the previous two upgrade cycles, we believe there is still plenty of potential upside to the current earnings upgrade cycle, which only started in July,” said Nomura.

This article appeared in The Edge Financial Daily, September 17, 2009.