We are upgrading our call on the sector to OVERWEIGHT on the grounds that NPLs are likely to be benign while the downtrend in provisions and strong capitalisation positions provide future earnings and capital management upside surprises, which may not have been fully reflected in banks’ valuations. The sector’s current FY10 PBV of 1.54x is undemanding vs its historical 1.68x average PBVs. We have 6 BUYS (Public Bank, TP: RM11.00, BCHB, TP:RM12.30, AMMB, TP: RM4.80, Hong Leong Bank, TP: RM6.20, RHB Cap, TP: RM6.30, EONCap,TP: RM6.00) and 1 NEUTRAL call (Maybank TP:RM6.20). We believe the valuations of smaller banks are likely to catch up with those of their larger peers given their significant lag and valuation gap of an average 1.1x PBV vs larger banks’ 2.2x PBV. Key risk remains an unexpected spike in NPLs.
