What you need to know about Malaysia's midcap banks

Hers's CLSA's take on Hong Leong, AMMB, RHB, and AFG.

According to CLSA, Hong Leong’s sector-leading credit quality, liquidity and capital ratios underpin its defensive attraction amids macro volatility.

The stock has struggled YTD but we believe the underperformance will reverse as investors focus on balance sheet strength as opposed to growth.

Here's more from CLSA:

AMMB - U-PF - RM7.30 target price
AMMB has been one of the relative outperformers YTD which has driven its valuation to 1.7x p/BV for 13-14% ROE between 13-15CL.

The recovery story is in its final phase and we are not convinced that additional ROE expansion will be as easy to achieve. We await news of the bank’s plans to acquire (or not) Hwang-DBS as well as the selection of its strategic partner for its life & takeful business. In our view, AMMB is fully valued at its current price.

RHB - U-PF - RM8.30 target price
Asset quality issues will continue to weigh on the stock as higher NPLs translate into sustained higher bad debt charge off rates.

The bank continues to have weak profitability and balance sheet ratios, leadership remains uncertain and there is overhang from the proposed Bank Mestika transaction.

Positive catalysts are unlikely to be forthcoming and thus, despite the discontinued valuation, we believe share price underperformance is set to continue.

AFG - SELL - RM5.30 target price
While qualitative strengths are intact as per peer-leading NPL, Casa and capital ratios, AFG’s retail portfolio is expected to face rising growth and asset quality headwinds.

M&A attraction is also cooling following the DBS-related termination of the Danamon deal. Medium term ROE is capped at 14% and we believe all of the positives are priced in. Reiterate Sell.