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Malaysia's banking sector resiliency may weaken: Analysts

New Straits Times logo New Straits Times 14/9/2020 Ayisy Yusof
a sign on the side of a building: MIDF Research said if investors want to have exposure to banking stocks, they should consider banks with strong borrower profile such as BIMB Holdings Bhd (BIMB). NSTP/HALIMATON SAADIAH SULAIMAN © Provided by New Straits Times MIDF Research said if investors want to have exposure to banking stocks, they should consider banks with strong borrower profile such as BIMB Holdings Bhd (BIMB). NSTP/HALIMATON SAADIAH SULAIMAN

KUALA LUMPUR: Banking analysts are mixed about the performance of the local banking sector this year, owing to uncertainties on the post-loan moratorium and Covid-19 related challenges.

Most of them have maintained their "neutral" call on the sector as the full impact in containing the pandemic in the country has yet showing its full steam.

However, they said the local banks had proven to be resilient amid the ongoing health crisis.

This is despite margins erosion in particular the modification loss, resulting from billions of financial assistance offered to millions of their customers.

MIDF Research head of research Imran Yusof believes that most banks were fairly valued at the moment as visibility on the potential impact was still quite low.

"But we are concerned about a potential spike in impairments, although banks are proactively managing this by contacting potentially troubled borrowers to restructure and reschedule their loans," he told the New Straits Times (NST) recently.

He said it would be too early to collect on banking stocks at the current juncture, citing that it was better to be patient until the dust clears on the issue of the loan moratorium.

However, he said if investors want to have exposure to banking stocks, they should consider banks with strong borrower profile such as BIMB Holdings Bhd (BIMB).

Banks that have performed solidly can also be considered including RHB Bank Bhd (RHB).

He said the immediate challenge for the banks would be the expiry of the loan moratorium as this could lead to higher impairments and non-performing loans (NPLs).

"Nevertheless, we believe that non-interest income (NOII) will continue to be solid and this will moderate the weakness in net interest income (NIM) and provisions, at least for the rest of this year," he said.

Imran said loans growth could also be sluggish, despite a rebound demand for mortgages and auto loans due to the Penjana stimulus.

"However, it remains weak for the business segment. Taking everything into consideration, we do believe that banks will be able to weather current difficulties given its strong capital position," he said.

MIDF Research is concerned about the potential impact of the loan moratorium on the banks' asset quality.

"Nevertheless, we do not foresee exacerbated stress to the banking sector as it faces the current headwinds on a position of strength," he added.

Hong Leong Investment Bank Bhd analyst Chan Jit Hoong said local banks' share prices were fairly undemanding due to lack of catalysts to perform.

He said currently it was not the time to accumulate banks' shares as it would be too early to claim that pain points from Covid-19 crisis were over.

"The banking sector may have to contend with the risk of delayed deterioration in asset quality. I think most negative have been baked into share prices, hence downside should be minimal," Chan told the NST.

He said low-yield environment and digital banking would remain the sector's key challenge in the future.

Thus, financial institutions should offer better quality of service, vigilant on costs and continue to innovate to brave the challenging period.

"The focus is always on NII portfolio but fee-based income will be a reflection of the economy. Thus, banks cannot rely on this during a downturn. As for treasury-related income, it can be volatile and not sticky," he said.

Chan said the local banking sector would face another challenging period towards this year end with the anticipation of another Overnight Policy Rate (OPR) cut by the central bank.

"This in turns will hurt the bank's NIM. Also, there may potentially be some more modification loss from the moratorium extension and targeted assistance (but the quantum should not as big as seen this second-quarter of 2020)," he added.

Chain said loans and deposits growth were also expected to taper while gross impaired loans ratio should slowly nudged up.

Separately, he said the banks' gross impaired loan (GIL) ratio would stay at low levels for the rest of the year, considering troubled borrowers would receive targeted assistance from banks.

"However, this may hide actual damage and cause lag in NPL formation if the situation does not improve rapidly or an advent of Covid-19 second wave paralyses the country again."

Chan said the local banking sector might have to contend with risk of delayed deterioration in asset quality and advent of a second wave infection.

Maybank Investment Bank Bhd (Maybank IB Research) analyst Desmond Ch'ng said local banks' earnings were expected to rebound in 2021, amid the challenges that could prevail into the second half (2H) of 2020 including credit costs post loan moratorium.

"Nevertheless, 2021 should see more stable NIMs and lower (albeit still elevated) credit costs. We project 2021 net profit to rebound 12 per cent after contracting 20 per cent in 2020," he said.

Ch'ng is still neutral on the banking sector and prefers mid-cap stocks for exposure, while recommending "buy" call for Hong Leong Bank Bhd, Hong Leong Financial Group Bhd, RHB, AMMB Holdings Bhd and BIMB.

He said challenges into 2H of 2020 remain the same with moderate loan growth, ongoing NIM compression, normalisation of expenses and potentially higher credit costs.

"Into 2021, we expect NIMs to expand year-on-year (YoY) and loan growth to pick up. However, overheads are expected to normalise while investment income is likely to be weaker YoY.

"We thus project 2021 operating profit growth of just 1.9 per cent, but higher net profit growth of 11.7 per cent YoY on lower credit costs. We expect a steep decline in average return on equity to 7.6 per cent in 2020 from 10.2 per cent in 2019, improving to 8.2 per cent in 2021," he added.

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