Cashing in on banks

WITH recent price retracements, it is a good time to invest in some banking stocks, but the sector may face major headwinds if the global trade war doesn’t end soon.

Fund managers and analysts are advising clients to accumulate the sector’s shares but to do it selectively, taking heed of risks.

“We are buying but in small quantities and slowly,” says Danny Wong of Areca Capital who manages about RM5bil in funds.

Wong notes that on average, the banking sector is now trading at a forward price earnings ratio (PER) of 9.3 times and a price to book value (P/B) of about one times, with a return on equity of 10.9%, subject to revisions.

Generally, the lower the P/B, the cheaper and more attractive a stock is deemed. In the case of banks, a ratio of less than one is attractive.

The P/B compares a bank’s current share price relative to its book value or essentially, the value of its assets.

In terms of dividend yield, which is what a lot of investors care about in a volatile market, some banking stocks currently give a yield of around 6% to 7%.

Rakuten Trade head of equity sales Vincent Lau reckons for those who have no exposure to banking stocks, now is a good time to buy for decent yields, at least when compared to fixed deposit rates.

“Banking stocks are generally relatively stable and provide a heavy weightage to the benchmark FBM KLCI,” he adds.

Former investment banker turned private investor Ian Yoong is a little more cautious, saying that while valuations are compelling and dividend yields are attractive after the recent sell-down in bank stocks, the heightened economic and geopolitical uncertainty “compels him to adopt a wait-and-see strategy” at this juncture.

“To paraphrase Baron Rothschild who is credited with saying that ‘the best time to buy is when there is blood on the streets’, we have yet to see blood on the streets,” Yoong quips.

He feels that in the light of worsening economic conditions, the banking sector is expected to face major headwinds.

“The global tariff policy imposed by the US government will have a major impact on the global economy. The full impact of the sharp rise in tariffs has yet to be felt.”

He also says that there is high likelihood of a reduction in interest rates by the US Federal Reserve.

Margin compression

“This will most likely result in lower profitability for the banks,” Yoong adds.

EquitiesTracker Holdings CEO Alvin Vong says that as banks have proven to be more resilient than most stocks in the recent major sell-downs, other stocks may be more compelling than lenders.

“Look for the stocks that have fallen the most, a lot of stocks are cheap today, this current noise should fade after a while so just ignore it and focus on the longer term,” Vong says.

Phillip Research analyst Eddy Do says the recent share price retracement of banking stocks presents an opportunity to accumulate them.

“We like CIMB Group Holdings Bhd as a liquid large-cap with a strong Asean footprint and Public Bank Bhd and Hong Leong Bank Bhd for their defensive nature and solid asset quality.

“We also have ‘buys’ on RHB Bank Bhd and Malayan Banking Bhd for their attractive dividend yields. We like AMMB Holdings Bhd as a preferred small-cap bank pick.”

Hong Leong Investment Bank analyst Chan Jit Hoong notes that the latest stress test on the local banking system continues to suggest that it is “robust and can stomach adverse shocks”.

In his latest report, he says valuations of bank stocks are undemanding while sector earnings outlook remains fairly resilient.

For now, he is not making changes to forecasts and stock calls.

“Following recent price retracement, valuations are undemanding, with the banking sector now trading near to -2SD or standard deviation, below its five-year pre-pandemic mean P/B at 1.06 times.

“Also, we noticed this is beneath the average trough valuation of 1.29 times for the past three crisis episodes, namely, the 2009 global financial crisis, the 2011 European sovereign debt crisis and the 2016 oil price collapse, but remains above the Covid-19’s bottom of 0.79 times.”

Analysts say the banking sector is entering into its current cycle from a position of strength.

For instance, as at the fourth quarter of 2024, loan loss coverage which indicates how prepared a bank is to cover potential losses from bad debts stood at 105%, which is much higher when compared with the pre-pandemic level of 89%.

“We find the banking system’s starting point today is far healthier, considering the current gross impaired loans ratio is lower at 1.45% versus the pre-crisis mean of 2.82%,” Chan says.

Banking stocks, which often reflect the state of an economy, had plummeted earlier this month alongside most stocks as investors, worried about the higher-than-expected 24% tariff imposed on Malaysia by the United States, dumped their shares. The KL Finance Index, which tracks the stock performance of local banking stocks, remains about 8% down from its peak this year.