Local banks to see high dividend yield plays, but lack catalysts

By NG MIN SHEN / Pic By TMR File

MALAYSIA’S domestic banks are evolving into high dividend yield plays as growth is scarce and capital is ample, although the lack of catalysts continues to be a concern, said JPMorgan Securities (M) Sdn Bhd.

“Other than valuations and positioning, they (banks) lack catalysts, in our view. Hence, we are taking a bottom-up view,” the research house said in a recent note.

On Malayan Banking Bhd (Maybank), the research firm is closing its ‘Underweight’ call as the stock has come close to its price target, while CIMB Group Holdings Bhd and Hong Leong Bank Bhd (HLB) have been upgraded to ‘Overweight’ from ‘Neutral’.

“Valuations are the only reason to own CIMB (shares), while at HLB, we expect a sharp pick-up in payout starting next month (June financial year-end). In case corporate credit rebounds, loan growth and fee business will benefit Maybank and CIMB. Yet, given lack of clarity on timing, we prefer CIMB which offers better value,” the investment bank noted in a recent report.

The potential initial public offering of Etiqa, the insurance and takaful business of Maybank, is the single largest upside risk to Maybank.

At HLB, the bank’s investments have resulted in a 7% growth in assets/branch over the last three years versus a 1% growth for Public Bank Bhd, while cost/employee was at 6% for Public Bank versus 1% for HLB.

Thus, the return on equity (RoE) gap between the two banks is expected to narrow to 100 basis points (bps) in the next two years, leading to a smaller valuation gap as well.

“RHB Bank Bhd stays our top pick, as we expect dividend to almost double by 2021. RHB has two drivers — higher return on assets (RoA) as the bank leverages on historical investments, and a 144% increase in dividend per share in 2021E from 2018 levels, leading to a 9% yield in two years’ time. (An) insurance arm sale is an added positive, if it happens,” the research house said.

AMMB Holdings Bhd has been downgraded to ‘Neutral’ from ‘Overweight’ as the unlocking of value from the sale of subsidiaries appears tough.

For Asia excluding Singapore and South Korea, tangible assets/equity fell from 20 times in 2009 to 11 times now, while RoA has been stable at circa 110bps.

“Yet at 14% Common Equity Tier 1, Malaysian banks have excess capital. Moreover, circa 5% credit growth and around 11% RoE are leading to capital accretion at an around 46% payout. Accordingly, we expect a sharp pick-up in payout to about 60%, with dividend per share moving up 9% to 17% in the next two years,” JPMorgan said.

The spread between dividend yields of local banks and 10-year government yields/three-month Kuala Lumpur Interbank Offered Rate stands at 97bps/110bps currently.

“As spreads are at the highest levels over the last five years, higher dividends could drive stocks higher as well. Within banks, Maybank has had the highest spreads in the last five years, given its highest dividend yield in the sector at 6% (last five-year average).

“HLB and Public Bank have had consistent negative spreads. We expect RHB’s spreads to widen the most on expectations of higher dividend yields,” JPMorgan said.

The Kuala Lumpur Financial Index (KLFIN) closed 0.07% lower at 15,811 yesterday.

According to Bloomberg data, HLB contributed the most to KLFIN’s decline as it lost 1.36%, while CIMB provided the biggest boost with a 0.6% advance. RHB had the largest gain, climbing 1.31%.

Since the start of the year, the index saw an 8.59% decrease, while the benchmark FTSE Bursa Malaysia KLCI is down 4.66%.