Momentum of banking stocks still intact
Cheah Chor Sooi 
CIMB Group fell 5.2% during the market rout on Feb 5 and 6

BURSA Malaysia’s Finance index rallied 0.46% or 82.43 points on Feb 2 to close at a historical high of 17,979.58. Correspondingly, the FBM KLCI inched up 0.1% or 1.9 points to 1,870.48.

However, the index, which tracks 30 financial sector stocks including banks and insurers, reversed its uptrend following two days of sell-off on Feb 5 and 6 as major global markets reacted to the Feb 2 overnight Wall Street plunge.

After having plummeted to an intra-day low of 17,075.35 to close at 17,360.27 on Feb 6, the Finance index recovered 1.74% or 303.33 points to 17,663.6 at the close of trading on Feb 8.

Although banking stocks were impacted by the contagion effect of the Wall Street market turbulence, their decline was very much in tandem with the broad-based market fall with the KLCI being bashed to an intra-day low of 1,795.85 before paring losses to close at 1,812.45 on Feb 6.

Moreover, MIDF Research head Mohd Redza Abdul Rahman observes that the impact on banking stocks was mostly concentrated on heavyweight CIMB Group Holdings Bhd (down 5.2% over Feb 5 and 6), AMMB Holdings Bhd (down 9%), RHB Bank Bhd (-6%), and Hong Leong Bank Bhd (4.6%).

“These were possibly due to concerns of possible downside risks on loans growth from lower loans demand and also higher application rejection rates,” he tells FocusM. “Hence, the short term impacts those concerns will have on bank earnings.”

Analysts have attributed the market crashes on Feb 2 and 5 which saw the Dow Jones Industrial Average index erased a staggering 1,840.96 points to concerns that the US Federal Reserve could raise rates four times this year instead of three to check faster-than-expected pick-up in inflation.

On Jan 31, the Fed kept its target range for the federal funds rate (FFR) unchanged at 1.25% to 1.5%, but guided that the current economic conditions may warrant further gradual increases in the FFR with the market expecting another 25 basis-point (bps) hike in the March Federal Open Market Committee meeting.

While interest rate hike is generally healthy for banking stocks – banks generate more revenue in a high interest rate environment – the reality is that it could nevertheless spark jitters among investors which would adversely affect the overall market sentiment.

After all, the rout in the US equity market was also accompanied by US 10-year Treasury yields rising to a four-year high of 2.84%, up 44bps year-to-date.

 Top 10 banking stocks by market cap

Checks and balances

Bank Negara Malaysia’s (BNM) 25bps hike in its overnight policy rate (OPR) from 3% to 3.25% on Jan 25 – the first time since July 2014 – premised on “the economy (being) firmly on a steady growth path” while “preventing the build-up of risks that could arise from interest rates being too low for a prolonged period of time”.

Analysts generally view the OPR hike to be short-term positive for the banking sector given it will provide a short-term boost to net interest margins (NIM) as there will be a near-immediate adjustment to loans and financing with a floating rate.

They also do not see such action as kickstarting a monetary tightening process. In other words, the central bank is very unlikely to impose more hikes over the next 12 months.

Like in the US, this was a tough decision by BNM, partly due to high inflation rates. With a strong growth momentum, low interest rates are feared to result in financial imbalances. As such, the rise in OPR will likely improve Malaysia’s attractiveness among foreign investors, leading to stronger capital inflows and further appreciation of the ringgit.

However, with investors spooked by the rising global bond yield – whereby the Fed may turn more hawkish than expected – the global sell-off phenomenon could extend over the near term as traders may shift their investment from stocks to bonds, according to Hong Leong IB Research retail research head Loui Low Ley Yee.

“Also, the negative regional sentiments could spill over to the stock market, leading towards an extended profit-taking measure by the traders, eventually,” he wrote. “Small caps and lower liners may suffer another round of sell-offs, while heavyweights are likely to see limited upside as the FBM KLCI is trading near the 1,890 zone.”


Consolidation is healthy

As the banking industry accounts for about 32% of weightage in KLCI Index, the sector’s prospect would inevitably provide a harbinger of the benchmark index’s performance.

MIDF’s Mohd Redza deems the recent correction as healthy given banks such as CIMB and AMMB are quite high in the overbought zone based on their 30-day Relative Strength Index measure of above 70.

“There will be short-term concerns as companies and individuals adjust to the higher loan payments and also lower loans application and approvals,” he suggests.

“But in the medium and long term, we opine that with expectation of solid GDP performance this year, loans growth will pick up for this year [the research house maintains its loans growth projection of 6% year-on-year (yoy) for CY18].”

On average, Malaysian banks reported rather decent results with the third quarter’s profit surging more than 11% year-on-year (yoy) while on a nine-month cumulative basis, banks’ net profit soared about 15%.

The strong financial performance was a result of healthy loans growth, improving NIM on average, banks’ NIM expanded by 3.7% for the three quarters ended September and a better control on operating expenses.

On investment strategy, Inter-Pacific Research Sdn Bhd head of research Pong Teng Siew recommends a small stable of steady performers among the big cap sector stocks as well as mid-range capitalisation stocks.

“Many of the earnings of non-bank finance stocks, eg insurance companies, to a varying degree depends on equity market conditions that supplement underwriting profits,” justifies Pong. “On their part, larger banks retain some leeway to tap stable transactions and other fee-based income by riding on their large branch networks to control a lion’s share of fee-based transactions income.”

This article first appeared in Focus Malaysia Issue 271.