Banking - Some Headwinds

Date: 02/07/2021

Source  :  KENANGA
Stock  :  TAKAFUL       Price Target  :  5.85      |      Price Call  :  BUY
        Last Price  :  3.97      |      Upside/Downside  :  +1.88 (47.36%)
Source  :  KENANGA
Stock  :  BIMB       Price Target  :  5.10      |      Price Call  :  BUY
        Last Price  :  3.25      |      Upside/Downside  :  +1.85 (56.92%)
Source  :  KENANGA
Stock  :  MAYBANK       Price Target  :  10.75      |      Price Call  :  BUY
        Last Price  :  8.15      |      Upside/Downside  :  +2.60 (31.90%)
Source  :  KENANGA
Stock  :  ABMB       Price Target  :  2.20      |      Price Call  :  SELL
        Last Price  :  2.77      |      Upside/Downside  :  -0.57 (20.58%)
Source  :  KENANGA
Stock  :  AMBANK       Price Target  :  2.85      |      Price Call  :  HOLD
        Last Price  :  3.39      |      Upside/Downside  :  -0.54 (15.93%)
Source  :  KENANGA
Stock  :  CIMB       Price Target  :  4.40      |      Price Call  :  HOLD
        Last Price  :  5.24      |      Upside/Downside  :  -0.84 (16.03%)

We maintain our NEUTRAL call on the sector, following our recent downgrade. Sentiment on the banking sector is likely to be moderate, no thanks to prolonged lockdown measures, with the reintroduction of blanket moratoriums that hamper near-term earnings prospects. Suppressed economic movement could dampen demand for loans and prevent troubled accounts from recuperating. Coinciding with our softer in-house GDP growth expectations (5.0-6.0%), we had trimmed our average loans growth assumptions to3-4% (from 4-5%) which is mostly supported by positive traction in household loansoffsetting poor business environments. In this note, we also introduce ESG elements into our valuations following our recent exercise to scale each of the banks’involvement in the matter. Alongside that, we incorporate a higher risk-free rate amidst better MGS yields resulting in downward adjustments to most of our TPs with downgrades including ABMB(TP: RM2.20) from MP to UP while upgrading AMBANK (TP: RM2.85) and CIMB (TP: RM4.40) from UP to MP. Our Top Picks for 3QCY21 are low beta stocks, being MAYBANK (OP; TP: RM10.65) and BIMB (OP; TP: RM5.10). MAYBANK is once again our favourite for its defensive industry-leading dividend yields and encouraging asset quality in spite of its market leading share in loans. Meanwhile, we shine some light on BIMB as its restructuring exercise is due for completion in 3QCY21 and could unlock shareholder value. Fundamentally, BIMB is noteworthy for its strong ROE and low default risks amidst TRA exercises

1QCY21 earnings a mixed bag. During the period, we saw 2 earnings surprises in CIMB and MAYBANK and 2 disappointments in AMBANK and MBSB. Our call coverages performed within our expectations (ABMB, AFFIN, BIMB, HLBANK, PBBANK, RHBBANK). CIMB’s better performance was thanks to better NOII derivative income, though this could wane off in the coming periods. Meanwhile, MAYBANK registered stronger results as its repriced deposits have generated much lower cost of funds, hence better-than-expected NIMs. On the flipside, AMBANK and MBSB disappointed as they book larger-than-expected impairments allowances to buffer against Covid-19 uncertainties.

Cautiously on guard. The implementation of lockdown measures coinciding with the MCO 3.0 is expected to put a dampener on the banking sector, especially since its indefinite extension has led to the reintroduction of blanket moratorium. Recall that the six-months moratorium implemented last year cost the sector an estimated RM6.4b arriving from modification losses and repayment assistance. That said, we opine that there should be less pains given that most of the at-risk accounts and sectors have already opted for relief measures in the prior year. Additionally, as the moratorium this time around is on an opt-in basis, it is likely that the take up could not be as significant as last year, possibly resulting in much smaller modification losses (CY20: RM5.2b across our 10 banks). Still, this could spell the need for further provisioning by banks in anticipation of the deterioration of asset quality over time. As such, we do not discount the possibility of downward revision to corporate guidances (refer to Table 5 for updated corporate guidance post-1QCY21).

Recalibrating valuations. With a rising awareness in sustainability and ESG issues, we have conducted a study between the 10 banks within our coverage as a continuation of our earlier sustainability analysis published on 17 May 2021. Briefly, we incorporate the beliefs that investors are willing to afford better valuations for companies who are willing to invest and promote sustainable practices and vice-versa. On the flipside, we noted that the uptrend in MGS yields is likely to sustain and hence is reflected in an increase in our applied risk-free rates for our calls during this season. (refer to Table 8 for the summary of changes to TP and calls in this note)

Maintain NEUTRAL on the Banking Sector. Recent developments are definitely not the be-all end-all for the banks as the financial system is upheld by adequate capital management and government initiatives being introduced to soften the blow to the public. That said, we believe sentiment could be lost from the said extension of movement controls and economic restrictions. Additionally, as bond yields regain some vigour, banking equities could also lose some favour, as reflected in our updated target prices. On the flipside, the overall equity markets remain bogged down by constantly fluctuating expectations of economic recovery as well as sector-specific beneficiaries (i.e. healthcare, vaccine-linked companies) and non-beneficiaries (i.e. tourism, retail companies). With regards to this, we believe that shifting our investment strategy to low-beta stocks (<1) would be prudent on top of their respective investment merits. Henceforth, our top pick for 3QCY21 is MAYBANK (OP; TP: RM10.75) as its industry-leading dividend yield (7-8%) and dividend-to-ROE would provide sizeable buffers for investors seeking a long-term play amidst ongoing macroeconomic uncertainties. Additionally, its GIL ratio is still fairly within the industry average of c.2.2% which indicates the bank has sound asset quality measures despite being the market leader (c.30% financing share) between the 10 banks within our coverage. Further, its high fixed-rate loan mix (c.28%) is offset by its high CASA-to-deposit ratio (c. 40%) to cushion OPR fluctuations in the near-term. Another notable low-beta pick would be BIMB (OP; SoP-TP: RM5.10).

We also like to highlight BIMB with its restructuring earmarked for completion by this 3QCY21, we opine that participating investors would enjoy unlocked value from Bank Islam being the sole shariah-compliant bank in the market. It also helms ROEs of +10% which could have been previously shied due to interest in conventional players. Additionally, the bank’s low proportion of targeted assistance programs (c.8% of total outstanding loans) and GIL (<1%) demonstrates high resilience in the days to come. Recall that the restructuring entails the distribution of 0.25x TAKAFUL (OP; TP: RM5.85) share per BIMB share. For illustrative purposes alongside our assumptions, 4 BIMB shares post-restructuring could fetch a FY22 dividend payment of 57.6 sen from Bank Islam and 20.0 sen from one TAKAFUL share, indicating a dividend yield of 5%.

Lowering CY21 loans growth expectation. As of May 2021, system loans growth demonstrated a 3.9% YoY growth which is indicative of better economic prospects as opposed to the prior year where economic suppression was more severe arising from the first lockdown. That said, the remainder of CY21 should a fair share of headwinds as well given the recent extension of MCO 3.0 to an indefinite date with new daily Covid-19 cases still above the desired 4,000/day mark. Coincidingly, we trimmed our in-house CY21 GDP forecast to 5.0-6.0% growth (from 6.0-7.0% and below MoF’s 6.5-7.5%) mainly premised on lower domestic demand (primarily retail) and the closure of non-essential sectors.

Arising from this, we had also trimmed our loans growth expectations to 3-4% (from 4-5%) for the sector. Household loans should continue to rise as prospective homeowners and vehicle owners are taking advantage of the low interest rate environment. However, the demand for business loans could take a larger-than-expected blow as the said movement restrictions would threaten the livelihood of existing businesses while providing little incentives for new ones to operate. Regarding the former, prolonged enforcement could then lead to accounts forcing to default and thus thwarting momentum for economic recovery. At least in the medium term, we believe that as long as the National Immunisation Programme continues to roll out without much hiccups, the prospects for stronger economic recovery for the latter half of 2HCY21 should remain intact and make up for the softness in 1HCY21.

Resiliency to be tested. From 1QCY21 results, we had gathered that most banks are still well-contained with regards to the quality of their respective books with GIL ratios seeing a QoQ improvement. This could be mainly due to higher defaults being seen in 4QCY20 as well, whereby the first blanket moratorium had lapsed. In the meantime, NIMs have registered improvements as the repricing of fixed deposit and savings products have assisted in narrowing the cost of funds, also attributed to generally higher CASA-to-deposit ratios as customers are opting to keep cash liquid.

That said, there is caution on how much of an impact the MCO 3.0 lockdown could mean to previously sound assets if it is prolonged beyond expectations and with the new blanket moratorium only delaying inevitable defaults by these accounts. This could translate to greater provisioning needs / higher credit costs for the banks. As of Mar 2021, we gathered that targeted assistance programs between the banks make up 7-16% of their respective gross loans and this is likely to expand further, especially with the moratorium in place.

All in, there could be pressure for the banks to further thin its asset yields to stimulate loan demand in the state of an economic lull, writing off the gain in NIMs from last year. With that, we believe there is a likelihood for corporates to trim their previous guidance to a more prudent level.

Source: Kenanga Research - 2 Jul 2021

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