Investment Highlights

• Banks’ 1Q20 core calendarised earnings growth (based on 6 banks which have released their results) slipped 11.3% YoY due to lower interest income from OPR cuts and higher provisions. Earnings of Maybank, Public Bank, RHB Bank, Hong Leong Bank and BIMB were within our expectations while that of CIMB were below our estimate due to higher provisions and weaker non-interest income (NOII). Meanwhile, AMMB and Alliance Bank’s results’ announcements are scheduled to be released on the 4th week of June.

• Loan growth continued to moderate to 3.0% YoY in 1Q20 with Maybank and CIMB’s higher than the industry’s domestic credit growth, partially offset by the slower growth of their international markets’ loans. We continue to expect the industry loan growth to be 2.0% for 2020 vs. 3.9% in 2019. This will be supported by banks extending SME Special Relief facilities (SRF) to ease borrowers’ cash flows. Meanwhile, the deferment of repayments of individual and SME loan borrowers for those opting for the 6-month moratorium (April to Sept 2020) is also expected to contribute to a higher outstanding loan base for banks. Recall, interest will continue to be accrued for individual and SME loans except for fixed rate financing despite no payments from the borrowers.

• The sector's NIM fell 10bps QoQ in 1Q20 due to the OPR cuts of 25bps each in Jan and Mar 2020. Our banks’ earnings have already factored in 100bps of rate reduction for this year, which includes the 50bps OPR cut announced on 5 May 2020. The next MPC meeting will be on 7 July 2020. We are monitoring the interest rate swap and KLIBOR closely. At this moment, we do not see another 25bps cut in the OPR priced in as yet by the market based on the latest interest swap rate. Regionally, Thailand, Indonesia and Philippines have kept their interest rates unchanged in April and May 2020 (Exhibit 8). For 2020, we expect NIM for the sector to be compressed by 6bps and a lower NIM contraction of 1– 2bps on average in 2021.
  
  Pressure on interest margins is likely to be lesser in 2H2020 taking into consideration of 4 rate cuts of 100bps cumulatively, and the recognition of day 1 modification loss for the loan moratorium in 1H2020. Further interest rate cuts are only anticipated if the domestic economic recovery is derailed by the worsening of the Covid-19 pandemic (a more severe 2nd wave that would impact GDP growth and the unemployment rate).
   
• The sector’s NOII was higher YoY in 1Q20 due to investment gains of Maybank and Public Bank. We see a potential revaluation or markedto-market gains on bank’s securities portfolio in 2Q20 compared to 1Q20 due to the recent favourable swings in MGS yields. Yields have declined in 2Q20 compared to the spike seen in Mar 2020 due to foreign selling of securities resulting in holdings of MGS and MGII by foreign investors dipping to 36.8% and 5.7% respectively. We continue to favour Maybank and RHB which have higher FVTOCI reserves than peers. The high reserves will allow these banks to benefit more from the favourable yield movements by monetizing gains from the sale of securities.
• Higher GIL ratio for the sector in 1Q20 at 2.11% largely due to the rise in impaired loans of CIMB. Credit cost in 1Q20 was higher at 0.58% (4Q19: 0.27%) due to preemptive provisioning by banks for the Covid-19 impact and CIMB’s full provisioning of RM430mil for a defaulted oil trader’s loan in Singapore. We expect credit cost for the sector to be higher at 43bps in 2020 vs. 22bps in 2019. For 2021, we project the sector’s credit cost to remain elevated at 45bps.

• The sector's calendarised core earnings growth for 2020 is now revised to -15.0% from -4.1%. For 2021, we project a recovery in earnings to +6.6% based on expectation of lower pressure on interest margins while credit cost remains elevated. Maintain NEUTRAL on the sector on concerns in upticks in loan impairment after the loan moratorium. We have rolled over our valuation to FY21 for banks with financial years ending December. Our top picks remain Maybank, RHB Bank and Hong Leong Bank.

Source: AmInvest Research - 18 Jun 2020