Investment Highlights

• We maintain NEUTRAL on the sector on concerns in upticks in loan impairments after the loan moratorium ends. The loan moratorium (April to Sept 2020) will see a delayed impact of the upticks in impaired loans. Banks have been proactively restructuring and rescheduling loans as well as granting relief funding to better manage spikes in impaired loans. Nevertheless, there are likely to be still certain loans falling into the impaired loan bucket after the moratorium ends attributed to the cessation of businesses and higher unemployment rate. On a comforting note, banks are already gradually building up their provisioning buffers in anticipation of the impact of Covid-19. We project a higher credit cost for the sector at 43bps for 2020 compared to 22bps in 2019. Sector GIL ratio is expected to rise from the present 1.6% to below 2.0% towards the end of 2020.

• Industry loan growth will be muted at 2.0% YoY for 2020 vs. 3.9% YoY in 2019. Despite the easing of the MCO restrictions and reopening of more economic sectors, consumers and businesses are likely to remain wary of the new wave of the pandemic in 2H2020. Meanwhile, deposit competition is expected to remain minimal due to the limited growth for loans.

• For 2020, we now expect net interest margins (NIM) for the sector to be compressed by 13bps on average. BNM has just announced another 25bps cut to the overnight policy rate (OPR), reducing the benchmark interest rate to 1.75%. Every 25bps reduction in the rate is expected to impact most banks’ NIM by 2–4bps and net profit by 1–3%.

• The central bank’s recent monetary policy statement highlighted that global growth conditions continued to be weak with a negative growth projected for the global economy in 2020. Also, it hinted that weaknesses in the labour markets and the continued cautious behaviour of households and businesses could affect the economic recovery ahead. Meanwhile, inflation for 2020 is anticipated to stay subdued with headline inflation in the negative due to the lower crude oil prices.

• Arising from the dovish statement, we have inputted in another 50bps rate cut into our earnings of banks for 2020. This included the 25bps reduction which has just been announced, bringing to a total of 150bps rate cut factored into our estimate for banks’ earnings in 2020. We expect a further rate cut of 25bps in 2H2020. The impact analysis for the additional 50bps rate cut on banks’ net profit, interest margin and ROEs are shown in Exhibit 2. Alliance Bank is seen as the most affected by the rate cut, followed by BIMB.

• While there remains pressure on interest margins in 2H2020, it will be lesser than in 1H2020. This is after taking into consideration the substantial rate cuts of 100bps cumulatively, and the recognition of day 1 modification loss for the loan moratorium in 1H2020.

• The statutory reserve requirement (SRR) is expected to be sustained at 2.0% since MGS and MGII are now temporarily recognised and allowed as placements by banks to comply with the ratio. This has indirectly allowed RM16bil of liquidity to be released into the banking system.

• We expect NOII growth to remain unexciting with challenges continued to be seen on capital market activities. New issuances of securities (equity and bonds) are likely to trend lower than last year. However, there will be bright spots on trading and investment income with opportunities continuing to exist for banks to monetize gains on securities portfolio with the favourable swings in MGS yields. Also, the decline in yields after the OPR cuts is expected to result in marked-to market gains for banks’ securities portfolio. This will help cushion the impact of rate cuts on interest income and margins. We continue to favour Maybank and RHB which have higher FVTOCI reserves than the other banks.

• The sector's calendarised core earnings growth for 2020 is now revised to -17.9% from -15.0%. For 2021, we project a recovery in earnings to +7.7% based on expectation of lower pressure on interest margins going forward while credit cost remains elevated

Source: AmInvest Research - 8 Jul 2020