KUALA LUMPUR: The local banking sector is expected to see its earnings grow 10.6 per cent this year, according to Affin Hwang Capital.
This will ease to a more modest 3.8 per cent next year before slightly rising 4.1 per cent in 2019, the firm said in a report today.
Affin Hwang Capital said favourable domestic demographic trends (driving consumption and housing needs), ample infrastructure projects in the pipeline and accommodative monetary policy are supportive reasons for the growth in earnings.
“The sector’s overall valuation in 2017 still appears attractive at a 1.35 times price to book value multiple (on a forward basis) against the past 10-year average of 1.6x and the past five-year average of 1.5x,” it added.
Key risks for the sector include new bad loan formation, net interest margin compression, higher funding costs, weaker loan growth and much higher provisions on FRS 9 (financial reporting standards) adoption.
Affin Hwang Capital’s top picks are AMMB Holdings Bhd, Public bank Bhd and Malayan Banking Bhd.
The firm upgraded its rating on AMMB from “hold” to “buy” with a price target of RM5.20 (based on 0.9x P/BV on calendar year 2018). “We believe the recent selling of the stock is unjustified (currently trading at 0.77x P/BV versus the sector at 1.35x), subsequent to the aborted merger plan with RHB Bank Bhd,” it added.