Banking sector not completely out of woods yet

KUCHING: The banking sector is not completely out of the woods yet, analysts opine, with earnings ahead to remain uncertain and volatile.

According to Affin Hwang Investment Bank Bhd (AffinHwang Capital), the Covid-19 pandemic and implementation of the movement control order since March 18, had caused unprecedented challenges to business activities and shifted the supply- demand dynamics.

“We do not think that the banking sector is completely out of the woods yet.” the research firm opined.

“Though we expect a 13 per cent year on year (y- oy) recovery in sector core net profit in 2021E, this is subsequent to a drastic decline of 28.6 per cent y- o-y in 2020E.

“In our view, the banks’ balance sheet and liquidity will be subject to more stress in 2020-21E due to the moratorium period offered to borrowers as well as higher risk of defaults as economic circumstances remain uncertain.

“That said, we still take comfort in the strong capitalisation levels (CET1 ratio at 14 per cent as at May 2020 and Total Capital Ratio at 17.7 per cent as at May 2020) while the capital buffer (in excess of regulatory requirement) of RM121 billion as at February 2020, remains fairly robust.”

Based on its assumptions for the banking sector for 2020E, AffinHwang Capital expected system loans to decline one per cent y- o-y, net interest margin ( NIM) of 1.95 per cent (with four rate cuts in 2020), net credit cost at 56bps and cost income ratio (CIR) at 48 per cent.

As for the research arm of Kenanga Investment Bank Bhd ( Kenanga Research), banks earnings ahead remain uncertain and volatile while the path to recovery is unlikely to be clear cut.

“Early signs from the banking statistics suggest that pre- emptive loan provisioning may see an acceleration in the second quarter (2Q),” Kenanga Research said.

“In mitigation, the reopening of the economy and significant cuts to policy rate have helped clear some overhang for the sector. Also, Day One Modification losses may not be as bad as feared.”

RHB Bank Bhd was Kenanga Research’s top sector pick on attractive valuations and solid capital ratios to absorb higher loan allowances while maintaining a decent dividend payout.

“In addition, it is less impacted by Day One modification losses.”

The research arm also liked Hong Leong Bank Bhd as a defensive, “high quality” bank with a strong digital infrastructure that is poised to benefit from a post Covid-19 environment.

Additionally, AMMB Holdings Bhd’s (AMMB) valuations appeared undemanding and the research arm opined the stock could be an attractive catch-up play.

“Furthermore, AMMB had booked in aggressive preemptive loan provisioning during its 4Q of financial year 2020 (4QFY20) results, which could help keep further allowances ahead in check while management’s recent guidance on Day One Modification losses seem much lower than initial estimates.”