Investment Highlights

• We retain our OVERWEIGHT stance on the banking sector. We expect the sector's core earnings to recover and grow by 16.1% in 2021 based on higher total income from a pick-up in pace of loan growth, stable to slightly improved NIM, controlled operating expenses and lower provisions. This is after an expected sharp 22.2% contraction in 2020 earnings attributed to higher provisions which have been conservatively booked as management overlay and from changes to macroeconomic variables. Also, 2020 earnings were impacted by the compression in interest margins from consecutive OPR reductions cumulating to 125bps.
• In 2021, we are projecting loans for the Malaysian banking industry to grow by 4.0–5.0% with a faster pace of growth in household and non-household loans. This will be supported by a GDP expansion of 6.5–7.0% with improvements to private consumption and trade activities.
• We expect the low interest rate environment to persist moving into 2021 with no further OPR reductions. This will be supportive of the economic recovery. We do not see the intensity of deposit competition picking up significantly in 2021. With no further rate cuts, interest margins of banks will continue to recover from the reprising of liabilities in 4Q20 and into 1Q21. Overall, the sector’s NIM in 2021 is anticipated to be stable and even improve slightly compared to 2020.
• Opex will remain tightly managed with a projected growth of 1.0% leading to a stable CI ratio of 46.4% in 2021 (2020: 46.9%).
• 10-year MGS yields are expected to be more stable until the pick-up in economic growth is strong enough for interest rates to be hiked. We continue to see room for banks to monetize gains from FVOCI securities when the opportunity arises as their FVOCI reserves remained high from the earlier favourable movements in MGS yields. This will support NOII of banks.
• We still expect some weakness in asset quality for banks in 2021. However, the targeted payment assistance rolled out is expected to keep a lid on the sector’s asset quality or GIL ratio until 30 June 2021. After the end of the 6-month blanket automatic moratorium on September 2020, the loan moratorium was extended by another 3 months for individual borrowers who have lost their jobs while allowing those whose salaries were reduced to apply to lower their loan instalments. Under Budget 2021, additional repayment assistance was rolled out for B40 individual borrowers who are the recipients of the Bantuan Sara Hidup (BSH)/Bantuan Prihatin Rakyat (BPR) and microenterprises with loan facilities approved up to RM150,000. Between 23 November 2020 and 30 June 2021, borrowers in these two categories can apply to: i) defer monthly instalments by 3 months; or ii) lower monthly instalments by 50% for 6 months. Besides, concerns on asset quality will be mitigated by the likelihood of the distribution of Covid-19 vaccines in 2021 and the fact that banks have already made much of the provisions upfront in 2020 against any potential future credit losses.
• We expect provisioning for loan losses for the sector to be lower in 2021 vs. 2020 with banks continuing to further front load their provisions in 2020, conservatively booking more provisions as management overlays in the remaining months of 4Q2020. In 2021, we are assuming a lower credit cost of 47bps vs. 55bps in 2020.
• The key risks for the sector are: i) higher-than-expected provisions from deterioration in asset quality; and ii) compression in NIM from unexpected further cuts in interest rates.
• We expect the sector’s ROE to improve to 8.9% in 2021 vs. 8.6% in 2020.

We have BUYs on Hong Leong Bank (fair value: RM19.30/share), Maybank (fair value: RM9.50/share) and RHB Bank (fair value: RM6.15/share). Our BUY call on Hong Leong is premised on its strong asset quality, lower provisions compared to peers, improving NIMs from the faster pace of recovery from rate cuts and the robust profit contribution from its associate, Bank of Chengdu, which is riding on the economic recovery of China.

Source: AmInvest Research - 7 Jan 2021