Banks to see resilient earnings moving forward


KUCHING: The banking sector is expected to see resilient earnings moving forward, in tandem with the country’s sturdy economic growth supported by strong domestic demand, robust capital markets and exports.

RHB Research Institute Sdn Bhd (RHB Research) yesterday maintained its bullish outlook on the sector due to key factors such as its expectations of improving economic conditions ahead, robust earnings that remained well-supported by resilient domestic demand, robust capital market activities and benign asset quality.

In addition, decent dividend yields and valuations that were inexpensive, especially relative to the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) proved to be significant contributory factors as well.

With regards to earnings resiliency, RHB Research opined in a report, “Malaysian banks earnings are still very much domestic-centric, where domestic demand is resilient, capital market activities have been robust and asset quality largely benign.

“In addition, after having cut earnings in the fourth quarter of 2011 (4Q11) through to 1Q12, consensus earnings estimates have been creeping up. We think the upgrade cycle still has legs, a potential catalyst for share price performance of the banks ahead.”

RHB Research stated that macroeconomic conditions were expected to improve ahead and would bode well for banks’ earnings, given that banks were often viewed as ‘proxies to the economy’.

In the report, its base case scenario was for real gross domestic product (GDP) to sustain its expansion at around 4.9 per cent year-on-year (y-o-y) in the second half of 2012 (2H12).

For this year, it estimated real GDP growth of five per cent (compared with 5.1 per cent for 2011), accelerating to around 5.4 per cent in 2013.

“Banking stocks generally offer decent yields. With earnings staying resilient, we think this would also aid in terms of visibility for dividend yields as most banks have well articulated dividend policies.

“We project 2012 to 20113 forecast net dividend yields of 3.8 to 4.2 per cent, which compares well with the FBM KLCI. This, we think, would help provide support to share prices when markets are volatile.”

The research house further noted that Malaysia’s economy had weathered the global economic uncertainties well thus far, thanks to a public sector led spending and the implementation of projects under the Economic Transformation Programme, the Public-Private Partnership programme and various economic corridor projects such as the Iskandar Malaysia Corridor and Sarawak Corridor of Renewable Energy.

“The implementation of these programmes, in our view, will likely continue to sustain the country’s economic growth in 2H12 and into 2013. The country’s exports should improve ahead as global uncertainties clear out.”

Malaysia’s capital market had also performed well as trading and investment income for banks was strong in 1Q12 while debt capital market activities also helped boost fee income.

The country had also seen several high profile initial public offerings (IPOs) thus far this year with the likes of Felda Global Ventures Bhd and IHH Healthcare Bhd, while Astro Malaysia Holdings Bhd’s IPO was set for 4Q12.

As such, 2012 appeared to be turning out to be a good year for investment banking activities and would be positive for banking groups with strong investment banking franchises, it opined.

Making no changes to its earnings forecasts for banking stocks, the research house chose Malayan Banking Bhd, Public Bank Bhd and CIMB Group Holdings Bhd as the top picks for the sector.