Investment Highlights

• Banks’ 12M20 core calendarised earnings growth contracted by 20.8% YoY largely due to banks proactively setting aside provisions for potential credit losses. This was despite a marginally higher total income, supported by stronger non-interest income (NOII) which offset a weaker net interest income (NII) from interest rate cuts. 4Q20 saw banks further raising provisions prudently which dampened their earnings for the quarter. The results of banks were a mixed bag with operating expenses (opex) tightly controlled. The earnings of Maybank, RHB Bank, Hong Leong Bank, Alliance Bank (ABMB) meet our expectations. CIMB’s core earnings were below our forecast largely due to higher-than-expected allowances for credit losses. CIMB also reported higher provisions on debt securities and derivatives exposure in which the latter was related to the aviation industry. In contrast, Public Bank’s core cumulative earnings beat our estimate with better-than-expected NII and NOII while BIMB’s earnings were above our projection on higher financing income and lower opex. As for AMMB, the group’s underlying earnings were above consensus expectation.

• Slower pace of loan growth in 4Q20 for most banks. Regional banks Maybank and CIMB continued to report subdued loan growth with Malaysia’s loan expansion offset by a contraction in international markets’ loans. With the exception of CIMB and ABMB, the other banks registered stronger domestic loan growth in 4Q20 compared to the industry’s +3.4% YoY. The industry’s loan growth is expected to be moderately higher at 4.0–5.0% for 2021.

• The sector's underlying net interest margin (NIM) rose 11bps QoQ to 2.20% in 4Q20 supported by a reprising of liabilities and better deposit mix which lowered funding cost. All banks reported improvements in interest margins in 4Q20, underpinned by lower cost of funds. This led to an improved NII for banks in 4Q20. We expect stable to modestly higher interest margins for banks in 2021 with no further rate cuts. We maintain our OPR projection for 2021 of 1.75%.

• Stronger treasury, wealth management and brokerage income contributed to the rise in the sector’s NOII by 4.5% YoY in 12M20. 4Q20 saw further gains from sale of securities but generally investment and trading income was lower than in 3Q20. The 10-year MGS yield was more stable in 4Q20 vs. 3Q20 which was impacted by an OPR cut. Nevertheless, FVOCI reserves remained high for banks to further monetise gains from securities which will lend support to their NOII.

• GIL ratio for the sector (based on stocks under coverage) rose to 1.87% (3Q20: 1.83%) after the end of the automatic moratorium. In 4Q20, credit cost for the sector climbed to 0.96% (3Q20: 0.82%) as banks continued to be conservative, topping up further provisions. For 12M20, credit cost surged to 0.81% vs. 0.26% in 12M19.

Source: AmInvest Research - 9 Mar 2021