Banks’ balance sheet, liquidity under stress in 2H21
KUCHING: The banking sector is not completely out of the woods, as banks’ balance sheet and liquidity positions could potentially be subjected to more stress in the second half of 2021 (2H21), analysts say.
According to Affin Hwang Investment Bank Bhd ( Affin Hwang Capital), though a 20 per cent year on year ( y- o- y) recovery in sector core net profit in 2021E is expected, this is subsequent to a drastic decline of 32.7 per cent y- o- y in 2020E.
“In our view, the banks’ balance sheet and liquidity positions could potentially be subject to more stress in in 2H21 due to a higher risk of default as economic circumstances remain uncertain,” Affin Hwang Capital said in its Malaysia banking sector update.
The research firm recapped that Bank Negara Malaysia ( BNM) in its 1H20 Financial Stability Review had projected that the system gross impaired loan (GIL) ratio could potentially rise to 3.1 per cent by end-2020 and 4.1 per cent by end 2021 under its macro simulation for businesses and households (with a higher risk in 2H21 due to maturity of some bullet loan repayments).
“That said, we still take comfort in the banking system’s strong capitalisation levels (CET1 ratio at 14.6 per cent and Total Capital Ratio at 18.4 per cent as at end- Sept 2020) while the capital buffer ( in excess of regulatory requirement) of RM128 billion as at endSeptember 2020, remains fairly robust.”
Based on its assumptions for the banking sector for 2020E, Affin Hwang Capital is expecting system loans to grow by 2.5 per cent y- o- y, net interest margin ( NIM) of 1.93 per cent ( with four rate cuts in 2020), net credit cost at 70 basis points ( bps) and cost-to-income ratio (CIR) at 51 per cent.
Meanwhile, the research arm of Kenanga Investment Bank Bhd ( Kenanga Research) opined that asset quality will likely be the key swing factor to earnings in the coming quarters.
As such, Kenanga Research kept with its preference for banks with solid asset quality such as Hong Leong Bank Bhd and Public Bank Bhd.
“Their asset quality track records suggest that the pre- emptive loan provisions required should be lower relative to peers while the smaller exposure to the corporate space would shield them from chunky loan impairments,” the research arm said.
“Thus, we see these banks offering investors better earnings predictability and ‘ safer’ dividend yields, assuming banks continue to be conservative with dividend pay- outs.”
Kenanga Research also liked RHB Bank Bhd ( RHB) for the group’s capital strength.
“While this may not translate to higher dividend pay- outs versus peers in the near term, RHB should be able to resume with its capital management plans relatively quick once the pandemic is past, versus peers that may need time to rebuild their capital positions.”
As for the Kenanga Research’s pick as a catch- up play, the research arm chose AMMB Holdings Bhd.
On the other hand, Affin Hwang Capital’s preferred stock pick was Aeon Credit Service ( M) Bhd.
The research firm believed that there is a value proposition in Aeon Credit as we look to a recovery year in financial year 2022 ( FY22E), with receivables growth of 7.9 per cent y- o- y ( versus 5.7 per cent y- o- y in FY21E) and a lower net credit cost of 362 basis points ( bps), versus 456bps in FY21E).
“Aeon Credit continues to find niche opportunities amid the Covid-19 pandemic, which has fueled stronger motorcycle sales (due to ecommerce growth), auto (used car) sales and the need for more personal financing (cheaper means of credit- card refinancing).”