OSK keeps 'neutral' call on banking sector

 

OSK Research’s top pick is Public Bank, recommends 'neutral' for Maybank, 'buy' for Hong Leong Bank and 'sell' for AMMB

OSK Research maintained a "neutral" call on the banking sector on the back of a potentially steeper-than-expected earnings risk.

In its research report, OSK Research said valuations had fallen to levels that long-term investors would deem appealing but have not fully priced in a potentially steeper-than-expected earnings risk.

OSK Research said banks would continue to bear a fair degree of valuation risks given the increasingly challenging domestic and global macro-economic conditions.

According to OSK Research, the sector as a whole has not seen an increase in non-performing loans (NPLs) since 2002. Loans growth has been relatively robust, partially driven by cheap mortgage rates.

“This could increase the risk of asset deliquency in an economic downturn,” OSK Research said.

“Moving into 2009, we expect the impact of a weakening economic outlook as well as depressed consumer and business sentiment, to have an effect on slower, small and medium enterprises (SME) along with consumer credit lending growth."

Under the current macro-economic conditions, OSK Research believes that banks with the best asset quality track record and highest loan loss coverage ratios will outperform.

In this respect, OSK Research’s top pick of the sector remains Public Bank.

As for Malayan Banking, given the likelihood of a relatively material reduction in dividend payout and earnings visibility risk from its riskier overseas ventures, OSK is maintaining a "neutral" recommendation.

OSK Research highlighted that the deteriorating macro conditions in Pakistan and the broader market turmoil will spread to emerging nations with relatively weaker financial standing.

This will certainly pose an upward risk in potential impairment losses on Maybank’s recent pricey acquisitions in Pakistan and Indonesia, OSK Research said.

As for Hong Leong Bank, OSK Research maintained a "buy" rating.

As 70 per cent of Hong Leong Bank’s non-interest income is derived from relatively more stable commercial banking transaction-based income, OSK Research believes that its non-interest income stream should remain relatively resilient given the potentially stronger forex income on the back of increased foreign exchange market volatility and hence hedging requirements.

As for AMMB Holdings, OSK Research is holding on to its "sell" recommendation.

AMMB’s earnings, it said, have one of the highest downside sensitivity under the current economic environment, given its strength in the riskier hire purchase loan segment and more volatile investment banking and stockbroking business. — Bernama