KUALA LUMPUR (June 6): Post-results season, analysts continue to see the banking sector in a positive light, in view of counters’ depressed share prices giving rise to attractive dividend yields.

In a note on Tuesday (June 6), Kenanga Research analyst Clement Chua maintained his “overweight” rating on the sector as diminishing valuations, on the back of slowing economic outlook and inflationary concerns, are giving rise to highly attractive dividend yields — with an industry average of 6%.

Touching on the sector’s 1QCY2023 results, Chua said seven out of eight of the research house’s forecasts came within expectations, with the only outlier being Bank Islam Malaysia Bhd (target price (TP): RM2.25) — due to under-accounting of future cost pressure from its digitalisation plans. 

“Post-results, we believe the uninspiring market sentiment provides entry opportunities into the highly resilient banking sector. Threats to the overall markets would derive from severe drags in asset quality from heightened inflationary pressures or further slowdown in domestic and global markets,” he said, adding the present weakening ringgit elevating import costs is not helping either.

Given the prevailing macro risks and volatile ringgit, Chua said the firm leans towards stocks with more fundamental backing for its recommendations. As Kenanga Research’s top picks, he has pegged Public Bank Bhd (outperform; TP: RM4.90) for its leading gross impaired loans (GIL) ratio supported by highly collateralised books, and RHB Bank Bhd (outperform; TP: RM7.10) for its leading Common Equity Tier-1 (CET-1) ratios in addition to now substantially more attractive dividend prospects (around 8% yield).

Similarly, MIDF Research analyst Samuel Woo maintained his “positive” call on the banking sector saying the “valuations [are] too cheap to ignore”. His top picks for the sector are Malayan Banking Bhd (Maybank) (buy; TP: RM9.28) and Hong Leong Bank Bhd (buy; TP: RM24.91).

Woo said the sector’s asset quality remains broadly manageable (1.78% GIL ratio), while fixed deposit rates saw an improvement (0.5% month-on-month (m-o-m) rise), but added that current account saving account (CASA) attrition was sharp with a 6.4% year-on-year (y-o-y) and 1.3% m-o-m decline respectively to 30.4%. 

Meanwhile, RHB Research analysts Wan Muhammad Ammar Affan, Nabil Thoo and David Chong said that while fixed deposits continued to outpace CASA, they noted that feedback from some banks’ management teams suggests that deposit competition has seen some easing post-1QCY2023.

In view of this, the trio see sequential net interest margin pressure (NIM) in coming quarters to be not as severe as that in 1QCY2023, assuming peak deposit campaign rates have passed coupled with an overnight policy rate (OPR) hike in May. 

“Despite topline pressure from margins and moderating loans growth, we believe banks have sufficient levers in place to support earnings and dividend growth,” they noted.

The RHB Research analysts maintained their “overweight” rating on the banking sector, naming Maybank (buy; TP: RM9.45), Hong Leong Bank (buy; TP: RM22.60), and CIMB Group Holdings Bhd (buy; TP: RM6) as their top picks.