KUALA LUMPUR: While boasting strong fundamentals and earnings, Malaysian banks still offer pricey valuations in comparison to their Asean peers, making them expensive to foreign investors. “Generally, investors look at the price to book value (PBV) ratio and in Malaysia they are still high although the PE (price to earnings) ratios are decent. “The valuations range from 1.7 times to more than three times, so in that sense, Malaysian banks are pricey,” said Pong Teng Siew, head of research at MIMB Investment Bank. According to Bloomberg data, the country’s two largest banks in terms of market capitalisation — namely Public Bank Bhd and Malayan Banking Bhd (Maybank) — were trading at 4.23 and 1.99 times to book value, respectively, last Friday. An analyst with a local research house said Malaysian banks were less attractive to foreign institutional investors due to their high valuations. Valuations of local banks are even higher than that of its peers in Singapore and Thailand, the analyst pointed out. “Bank valuations have come down at the moment, as they are merely reflecting the conditions of the current market,” the analyst said, adding that investors would have a better indication of bank valuations in the third quarter, as banking groups’ performances would be more visible during this period. In comparison, Singapore’s UOB Bank was trading at 1.88 times book value and Thailand’s Bangkok Bank was trading at 1.48 times. While Abu Dhabi Commercial Bank (ADCB) recently took up a 25% stake in RHB Capital Bhd from the Employees Provident Fund (EPF), MIMB’s Pong said this was an exceptional case as Abu Dhabi was keen on the resulting Islamic banking opportunities. The analyst with the local research house said prospects of foreign institutional investors coming to the Malaysian banking sector would dwindle as valuations of banks increased over time. Foreign institutional investors interested in acquiring a strategic stake in local banks would have to be big banking players such as Chinese banks, given their strong cash position and big appetite, the analyst said. Some local banks such as Public Bank, have a foreign shareholding limit of 30%, making it tough for foreign entrants to acquire a strategic stake in the banking group, the analyst said. The analyst highlighted that Malaysia’s banking landscape had become increasingly saturated, resulting in more local banking groups seeking opportunities abroad. “For instance, local banks can no longer boast that they have the net interest margin that Indonesian and Pakistani banks have,” the analyst said. But while foreign institutional investors are not rushing in to buy into Malaysian banks as yet, Pong said domestic banks were still on the radar of foreign portfolio investors, particularly the large and liquid ones like Public Bank and Maybank. “Maybank’s recent high-priced acquisitions (in Indonesia and Pakistan) have not gone down well with portfolio investors. However, its long terms prospects are not likely to be damaged,” he said. An April 14 report by Macquarie Research underscored investor concerns about the Malaysian banking landscape. Based on feedback on Asean banks from Macquarie’s clients in the US, they were most receptive to Thailand banks and least keen on Malaysian banks, according to the report. “Moderating loan growth, falling margins, weaker non-interest income and risk to higher operating expenses underscore the pressure on underlying profits. “This situation is compounded by the uncertainty posed by the challenging political landscape that could potentially delay the various government initiatives (the Ninth Malaysia plan and civil servants pay hike),” said Macquarie in the report. The research house named Public Bank and AMMB Holdings Bhd as its sole outperformers. Investors were seeking political clarity following the recent elections in Malaysia, with some wondering why Maybank had paid an exorbitant sum for Bank Internasional Indonesia, said Macquarie. The research house said it preferred Thailand due to a favourable top down assessment arising from political stability and anticipation that it will likely be the sole country to see faster gross domestic product (GDP) growth this year. “We believe banks are a good way to play the anticipated economic recovery, where we see a strengthening domestic demand story encapsulated by a rebound in consumer spending and spilling over to private and government spending. We expect faster loan and revenue growth (in Thailand),” Macquarie said. The research house also liked Singaporean banks due to its strong fundamentals despite pressure on margins and loan growth. It expected economic resiliency in the Philippines despite concerns over politics, inflation and remittance flow; and expected strong loan growth. Indonesian banks meanwhile, despite inflation concerns, remained attractive due to the lowest loan penetration, fastest loan growth, fattest margins and highest return on equity (ROE) in the region, Macquarie said.
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