Malaysian banking sector not out of the woods yet

PETALING JAYA: The Malaysian banking sector is not completely out of the woods, despite most investors looking to 2021 as a year of recovery, according to Affin Hwang Capital Research.

Despite the re-rating of share prices, the research house believes the prevailing downside risks in the economy and the banking sector may trigger a correction in the liquidity-driven market, which is overbought at this juncture.

“We agree that banking stocks have rebounded from their lows in 2020, but investors should continue to exercise caution,” the research house said in a report.

For 2021E core net profits, it has pencilled in a 13% year-on-year (y-o-y) recovery, following a sharp 28.6% y-o-y contraction in 2020E. Notwithstanding that, the sector return on equity (ROE) (2021E: 7.6%) remains at a 22-year low.

Furthermore, Affin Hwang opined that the sector’s ROE may potentially be stuck between 7% and 8% in 2020E-2021 which translates into a 22-year low compared with a peak of 15-16% seen in 2006-2007.

It said that the likely lower ROE will be driven by a deterioration in earnings, led by weakness in the banking system’s asset quality arising from repercussions of the Covid-19 pandemic and plunge in crude oil prices.

“Potential increases in Stage 2 and Stage 3 exposures of the banks’ loan books remain a risk going into 2021 due to lower household incomes, rising unemployment and deterioration of businesses’ debt-servicing capacity,” said the research house.

It explained that banks continue to face asset quality risks from exposure to vulnerable sectors such as oil & gas, real-estate and retail/tourism.

In addition, Maybank and CIMB will face the threat of non-performing loans (NPLs) from Indonesia.

Affin Hwang also pointed out most banks under its coverage have seen high take-up rates of the six-month moratorium offered to individuals and SME accounts, while around one-fifth of corporate loans have also been subject to restructuring and rescheduling (R&R) facilities.

As the moratorium period of these individuals and SME/business loans will end by September 2020, it said that any reclassification into non-performing status may only take place in 2021.

“Nonetheless, banks could undertake a more prudential provisioning stance should there be a significant increase in credit risk events,” it said.

The research house cautioned that the chance of a second wave of Covid-19 infections occurring is real, and could dampen investor’s hopes of a V-shaped economic recovery, driven by the negative repercussions from potential reinstatements of lockdowns.

“Our preliminary research indicates that a spike in the number of new Covid-19 cases post the reopening of economies has generally had mixed results. For instance, Beijing is now back to a lockdown state, while certain states in the US have seen rising daily cases after their reopening,” is said.

That said, the research house takes comfort in the industry’s strong capitalisation levels (CET ratio of 14.1% as of April 2020) while the capital buffer, in excess of the regulatory requirement of RM121 billion as of February 2020 remains fairly robust.

On the whole, Affin Hwang maintains its underweight call on the sector. Its top pick is Aeon Credit Service (M) Bhd, with a target price of RM12.30.

AmBank Research echoed its concerns over banks’ asset quality over the near term, as impaired loans are expected to rise after the moratorium.

“Banks have been proactively restructuring and rescheduling loans as well as granting relief funding to prevent a sharp rise in impaired loans. Nevertheless, there are likely to be certain loans falling into the impaired loan bucket after the moratorium attributed to the cessation of businesses and higher unemployment rate,” it said.

However, it is projecting a higher credit cost for the sector at 43 basis points for 2020 compared to 22bps in 2019, given that the banks are already gradually building up their provisioning buffers in anticipation of the impact of Covid-19.

AmResearch’s top picks for the sector are Maybank Bhd, RHB Bank Bhd and Hong Leong Bank Bhd.

source https://www.thesundaily.my/business/malaysian-banking-sector-not-out-of-the-woods-yet-FX2606326