Asset quality a key swing factor for banks

KUCHING: Analysts retain their ‘neutral’ view on the banking sector, with asset quality likely to be the key swing factor to earnings ahead.

However, they also believe capital strength would be an added factor in recovery post pandemic.

The research team at Kenanga Investment Bank Bhd ( Kenanga Research) in a report, said: “We continue with our view that asset quality will likely be the key swing factor to earnings ahead. This recent reporting quarter shows further loans loss provisioning by the banks with earnings visibility is still hazy.

“But we believe capital strength will be an added factor in recovery post pandemic.”

It noted that the key focus in the near term is asset quality, especially during this Targeted Repayment Assistance ( TRA) period.

Going into end of November 2020, it pointed out that the take-up rates for the TRA were quite muted but the banks do not discount uptick ahead depending on the impact of the current CMCO.

“Post third quarter of 2020 ( 3Q20) results, the banks have reported assistance within their guidance (10 to 15 per cent). Maybank reported the highest exposure in TRA Programmes ( Targeted Assistance & R& R) which we estimated at 14 per cent of total group loans with less than 10 per cent domestic.

“CIMB saw its Targeted Assistance & R& R) at circa six per cent of its group loan book with domestic at less than 10 per cent. B40 exposure by the banks are relatively minimal with most reporting the low teens of their loans book; AMMB, CIMB and PBK reported circa 10 per cent or under while those in low teens are Maybank (13 per cent), PBK (12 per cent) while RHB reported 14 per cent under its retail loan book.

“We noted further that some banks raised their credit cost guidance during the last reporting quarter. Same reason as before which is essentially due to management overlays but for CIMB and AMMB it was primarily due to macroeconomic overlays and early signs of repayment slippage (AMMB).

“We, however, do not discount further overlays ahead due to concerns of repayment given the prolonged CMCO,” Kenanga Research explained.

But not all is doom and gloom as the research team highlighted that loans saw a slight uptick quarter- on- quarter (up 0.9 per cent) in the last reporting quarter as the economy reopens under the RMCO.

Nevertheless, it pointed out that most banks still maintain their guidance for 2020 but remain uncertain for 2021.

“Despite the positive vaccine developments, most banks are still cautious on their outlook/ targets ahead maintaining concerns on further CMCOs as the efficacious and logistics of the vaccines are still in question,” it added.

BNM had kept the OPR unchanged at 1.75 per cent in its recent MPC meeting.

“Our economist thinks the MPC’s statement on the recovery outlook was relatively upbeat and hence, sees a higher chance that BNM may be done with its rate cuts for the time being ( provided no further negative macro risks).

“If BNM is indeed done with its OPR cuts, this would be positive for banks, easing NIM pressures.

“Most importantly, it may suggest that BNM thinks the economic recovery is on track.

“Hence, NIM is expected to improve ahead given the absence of further OPR cuts supported by re-pricing of deposits and unwinding of modification losses,” Kenanga Research said.

We continue with our view that asset quality will likely be the key swing factor to earnings ahead. This recent reporting quarter shows further loans loss provisioning by the banks with earnings visibility is still hazy. Kenanga Research