Investment Highlights

• We maintain our OVERWEIGHT stance on the sector as we anticipate improvement in underlying interest margins which will drive banks’ core NII (net interest income) higher, and stronger fees and commissions for NOII (noninterest income) while operating expenses will remain tightly managed resulting in positive JAWs.

• We project lower provisions for this year compared to 2020 with a credit cost of 50bps (2020: 60bps). 2020 saw banks front-loading provisions, building up significant pre-emptive allowances for loan losses in the form of management overlays and/or macro provisions. 1Q21 continued to see banks being conservative, topping up provisions (AMMB’s RM304mil macro provisions, Maybank’s RM200mil provisions as management overlay, RHB’s RM94mil additional pre-emptive provisions for potential impact of Covid-19 effects, CIMB’s RM103mil overlay for its Indonesia consumer loan portfolio, Alliance Bank’s RM89.1mil overlay coupled with Hong Leong Bank’s pre-emptive provisions of RM55mil).
  
  On a comforting note, the provision buffers built up by banks since last year are largely unutilized, thus are anticipated to cushion against the impact of the latest lockdown.
   
• We expect banks to further top up their provision buffers in 2H21 (additional overlays) due to the latest 6-month moratorium (opt-in). Applications for loan repayment assistance are expected to rise from the percentages seen in April and May 2021. Nonetheless, the take-up rate for the latest moratorium is expected to be much lower than that seen in 2020 under the automatic blanket moratorium (April to September 2020). This is in view of the continued accrual and charging of interest for all loans and financing. Hence, this will see only borrowers requiring the moratorium opting in.
  
  On the latest 6-month moratorium, it is likely to still see banks conservatively topping up provisions (additional overlays). Nevertheless, we do not expect these additional overlays to be substantial in amount unlike that seen in 2020. This is on the expectation that the economy is anticipated to progress towards recovery with the gradual opening of more economic sectors after achieving herd immunity against Covid-19 through mass vaccination.
   
• Modification loss (mod loss) for the latest moratorium is expected to be minimal and manageable for banks. Mod loss will be recognized in 3Q21. We expect it to be much lower than the cumulative amount of circa RM1.8bil for banks seen in 2Q20. For this round of moratorium, interest will continued to be accrued with banks waiving only compounded interest and penalty charges. This is unlike 2020 where banks had to waive the accrual of interest on fixed rate hire purchase (HP) and personal loans/financing.
   
• We keep our industry loan growth projection of 4.0–5.0% for 2021. Competition on deposits is expected to remain mild due to the strong CASA growth which continues to be seen in the near term for the banking system. We see withdrawals allowed through i-Citra under the Pemulih aid package to continue supporting the robust CASA growth of banks.
   
• No Further Rate Cuts in 2H21. The OPR Is Expected to Remain at 1.75% for the Rest of 2021.
   
• Sector GIL ratio is expected to be stable or inch slightly higher from the present 1.6% moving towards the end of 2021. The continued availability of repayment assistance to loan borrowers, including the 6-month moratorium, the option of a 50% reduction in monthly instalments over 6 months and restructuring and rescheduling (R&R) is expected to keep banks’ impaired loans stable for the next 6 months. Once borrowers have opted in for the moratorium, there will be a freeze in the staging of their loans.
  
  The country is accelerating Covid-19 vaccinations to cover a higher percentage of the population which is likely to see the gradual reopening of more economic sectors in 2H2021.
  
  The vaccination drive is gaining traction with the percentage of people vaccinated (at least 1st dose of vaccination) rising from 18.1% as at 30 June 2021 to 31.2% as at 19 July 2021. At the same time, the percentage of the population that has fully completed 2 doses of vaccination has risen to 14.4% as of 19 July 2021. Progress is seen in factories vaccinating their employees at vaccine dispensing centres (PPVs) under the Pikas initiative (public-private partnership).
   
• We expect a gradual improvement in banks’ core fees and commission income riding on the economic recovery in 2H2021 to support banks’ NOII. Meanwhile, we see challenges in sustaining investment and trading income in 2H2021. This is based on our expectation that banks may monetize more of the gains from securities in 1H2021 before further pressure from the upward movement in interest rates (MGS yields trending higher) starts to creep in.
   
• We have tweaked the sector's calendarised core earnings growth for 2021 slightly to 30.8% from 31.5% after adjusting our credit cost assumption for RHB Bank higher to 40bps from 30bps. For 2022, we forecast an earnings growth of 11.0% for the sector.
   
• Catalysts:
  1. Gradual uptrend in the interest rate cycle in line with the economic recovery which will lift interest income and expand net interest margins (NIM) of banks; and
      
  2. Stabilising provisions. Potential reversals of management overlays and prudent macro provisions once the worst (in asset quality woes) is over.
      
• Risk:
  1. Prolonged lockdown leading to higher applications for loan repayment assistance. This could lead to impaired loan ratios of banks inching up as well as top-ups in provisions by banks.
      
• We maintain our OVERWEIGHT stance on the sector with top picks on CIMB (fair value RM5.60), RHB Bank (FV RM6.90) and Maybank (FV RM10.40). We like CIMB, RHB and Maybank due to the expected improvement in core operating income coming from the gradual improvement in regional operations performance, progressive improvement in underlying NIMs and provisions for loan losses. Earnings of these banks are expected to benefit from the improved performance of their Singapore operations which in 2020 were affected by provisions (overlays and specific provisions). Also, we continue to see compelling valuations for these stocks and strong capital positions, particularly the robust capital ratios of RHB Bank.

Source: AmInvest Research - 22 Jul 2021