Investment Highlights

• Banks’ 9M20 core calendarised earnings growth contracted by 15.8% YoY largely due to banks cautiously booking further provisions as management overlay in addition to the provisions raised from changes to macroeconomic variables. 3Q20 saw banks further raising their provisions prudently which partially offset the improvement in total income from higher net interest (NII) and non-interest income (NOII). Earnings of Maybank, RHB Bank, Hong Leong Bank, Alliance Bank and BIMB were within our expectations. The core earnings of CIMB were below our forecast largely due to higher-than-expected allowances for credit losses. In contrast, the core cumulative earnings of Public Bank beat our estimate with a better-than-expected non-fund based income. As for AMMB, the group’s underlying earnings were above consensus projection.
• Moderate pick-up in loan growth in 3Q20 driven by a faster pace in domestic loans. Meanwhile, regional banks Maybank and CIMB still reported muted loan growth as the improvements in Malaysia’s loan momentum were offset by the slowdown in international markets’ loans. Most banks registered stronger domestic loan growth in 3Q20 which outpaced the industry’s 4.4% YoY expansion. We continue to expect the industry loans to grow by 3.0–4.0% for 2020. Moving into 2021, we expect the industry’s loans to register a higher growth of 4.0–5.0%.
• Modest unwinding of modification loss in 3Q20. Recall that the total net modification loss for banks under our coverage was RM1.78bil in 2Q20. 3Q20 saw some unwinding of modification loss for certain banks (CIMB: RM95mil; Public Bank:
• The sector's underlying net interest margin (NIM) improved 1bps QoQ to 2.08% in 3Q20 due to the reprising of liabilities and higher CASA mix which lowered funding cost. Most banks reported an improvement in interest margins in 3Q20 with deposits being repriced to lower rates to reflect the cuts in the OPR. Only CIMB, RHB Bank and BIMB reported contractions in NIMs QoQ. For RHB Bank and BIMB, we believe that it was due to the lagged timing of maturity of their deposits to be repriced, and 4Q20 should see their NIMs improved. Meanwhile for CIMB, the underlying NIM was compressed due to adjustments to effective interest rates (EIR) after the rate cuts in Indonesia.
• Stronger investment and trading income still the key contributor to the rise in the sector’s NOII by 4.1% YoY in 9M20. Stockbroking and fund management fee income were generally stronger YoY in 9M20. The decline in yields continued to raise the FVTOCI reserves of banks higher in 3Q20 leaving opportunities to still monetise gains on FVTOCI securities.
• GIL ratio for the sector (based on stocks under coverage) in 3Q20 declined to 1.83% (2Q20: 1.99%) as most retail and SME loans were still placed under the loan moratorium with the freeze in staging of loans. For 3Q20, credit cost for the sector remained elevated at 0.82% (2Q20: 0.89%) as banks continued to be conservative, booking further provisions as management overlay. For 9M20, credit cost climbed to 0.76% vs. 0.26% in 9M19.
• The sector's calendarised core earnings growth for 2020 is now revised to -22.2% from -21.6% largely after adjusting our assumptions for higher credit cost. We maintain our OVERWEIGHT stance with projected recovery in the sector’s 2021 earnings to +16.1% (earlier: +11.6%) based on higher total income from a pick-up in the pace of loan growth, stable NIM, controlled growth in operating expenses and lower provisions. We continue to expect banks to further front load their provisions in 2020, conservatively booking more provisions as management overlays in the remaining months of 4Q2020. Our BUYs are Hong Leong Bank (FV: RM19.30/share), RHB Bank (FV: RM6.15/share) and Maybank (FV: RM9.50/share) to ride on the economic recovery in 2021. For non-banks, we like HLFG (FV: RM19.00/share) which will leverage the improved fundamentals of Hong Leong Bank.

Source: AmInvest Research - 8 Dec 2020