Investment Highlights

• Banks’ 6M20 core calendarised earnings growth slipped 13.4% YoY due to lower interest income from consecutive OPR cuts and higher provision. This was despite a higher investment and trading income lifting banks’ non-interest income (NOII) in 6M20. Earnings of Maybank, Public Bank, RHB Bank, Hong Leong Bank, Alliance Bank and BIMB were within our expectations while that of CIMB were below our estimate largely due to higher provisions. Meanwhile, AMMB core earnings were above consensus projection.
   
• Still a low single-digit loan growth of 2.9% YoY for the sector. Domestic loans of Maybank and CIMB’s grew higher than the industry’s credit growth but was partially offset by a slowdown in international markets’ loans. Public Bank’s domestic loan continued to grow slower the industry’s while its international loans moderated due to a contraction in Hong Kong and China’s financing. We expect the industry loan growth to be 3.0–4.0% in 2020, underpinned by potentially further disbursements for special relief facilities for SMEs and a slightly better household loan growth in 2H20 than 1H20 after the easing of MCO restrictions.
   
• Modification loss came in significantly lower than market expectations in 2Q20. Total net medication loss for banks under our coverage came in at RM1.78bil (see Exhibit 8) vs. RM4.4bil reported by the media. Maybank and Public Bank, with relatively larger HP portfolio, reported net modification loss of RM314mil and RM498mil respectively.

• The sector's underlying net interest margin (NIM) fell 11bps QoQ in 2Q20 due to the OPR cut of 50bps in May 2020. Our banks’ earnings have already factored in 150bps of rate reduction for this year, which includes another 25bps cut expected in the next MPC meeting on 10 Sept 2020. For 2020, we expect the sector’s NIM to be compressed by 14bps while a flat interest margin on average is expected for 2021.

• The sector’s NOII rose by 3.8% YoY in 6M20 largely due to gains from disposals and marked-to market revaluation of securities. 2Q20 saw favourable movement in yields compared to 1Q20, resulting in marked-to-market gains from revaluation of securities while most banks including Maybank, RHB and Public Bank disposed of a portion of the securities to realise gains. Additionally, FVTOCI reserves of banks surged. Brokerage income was stronger for most banks in 6M20 due to the stronger equity market performance in 2Q20.
   
• GIL ratio for the sector (based on stocks under coverage) in 2Q20 declined to 1.99% with most banks recording lower impaired loans QoQ as a large percentage of retail and SME loans still under the loan moratorium. For 2Q20, credit cost for the sector surged to 0.89% (1Q20: 0.60%) with banks continuing to increase provisions due to management overlay. Besides, banks have factored in weaker macroeconomic data, resulting in higher expected credit losses (ECL), and hence the need for provisions to increase. For 6M20, credit cost climbed to 0.74% vs. 0.20% in 6M19. We are now projecting an average credit cost of 0.48% for both 2020 and 2021.
   
• The sector's calendarised core earnings growth for 2020 is now revised to -21.6% from -17.9% largely after adjusting our assumptions for higher credit cost. For 2021, we project a recovery in earnings to +11.6% (earlier: +7.7%) based on expectation of lower pressure on interest margins while credit cost remains elevated. Maintain NEUTRAL as uncertainties on the asset quality and credit cost post-moratorium continue to cloud the sector. Our top picks are Hong Leong Bank, RHB Bank and Maybank.

Source: AmInvest Research - 8 Sept 2020