Investment Highlights

• Prime Minister Tan Sri Muhyiddin Yassin unveiled the RM150bil Pemulih economic stimulus package yesterday. Among the measures announced were the availability of moratorium for 6 months to all individual loan (B40, M40 and T20) and SME borrowers commencing 7 July 2021.

• We understand that approval of moratorium for consumer loans will now be automatic while that for SME loans will be subjected to individual banks’ assessments.

• The process of obtaining approvals for moratorium on individual loans has been simplified. Borrowers are no longer required to show proof of loss of employment or reduction in income and provide documents unlike the targeted repayment assistance before this.

• The difference compared to the earlier 6-month (1 April to 30 September 2020) blanket automatic moratorium is that the latest moratorium requires borrowers to opt in. In the 2020 blanket automatic moratorium, all individual and SME borrowers’ loans and financing (with the exception of credit card) of <90 days in arrears were automatically included.

• At this juncture for the latest loan moratorium, there remains a lack of clarity if interest will be allowed to be accrued and charged for all types of loans and financing. If additional interest is allowed to be charged, then modification losses (mod loss) to be reported by banks in 3Q 2021 will be minimal, in our opinion.

• On the flipside, if accrued interest is to be waived for all fixed rate HP and personal loans for both conventional and Islamic banking similar to that in 2020, mod loss to be reported by banks in 3Q 2021 will be larger. Mod loss is an accounting treatment in line with MFRS 9 to factor in the time value of money due to the difference between the present value (PV) of the modified cash flows and the PV of cash flows when the fixed rate loans and financing were contracted.

• Recall in 2Q2020, the total net mod loss for banks under our coverage came to RM1.78bil (Exhibit 2). If accrued interest is waived again this round, the mod loss may be different from that seen in 2Q2020 as it will depend largely on the percentage of individual loan borrowers opting in and the availability of any concessionary rate funds like BNM’s Special Relief Facility (SRF) in 2020 for banks to lend to borrowers. The benefits from such funds (if any) will reduce banks’ mod loss on a net basis.

• At the peak of 2020’s blanket automatic moratorium, circa 90% of household borrowers and 87% of household loans were under the moratorium. Should the opt-in percentage for the latest moratorium be also high, the banking system asset quality (GIL) ratio (presently at 1.6%) is envisaged to remain stable until the end of 2021. We do not expect any deterioration in staging for loans under moratorium similar to 2020.

• As mod loss (if any) is a one-off accounting change, it does not affect our estimates on banks in 2021 and 2022 which are based on core earnings. In 2020, we have stripped out the impact of mod loss net of tax from banks’ earnings. Our valuation for banks, which are already based on FY22 earnings, are unchanged.
   
• The country is accelerating Covid-19 vaccinations to cover a higher percentage of the population. More economic sectors are expected to gradually open in 2H2021, leading to the potential full reopening of the economy in Nov or Dec 2021. We do not expect further rate cuts from the current OPR at 1.75% which will reflect positively that the country is progressing towards economic recovery.
   
• We expect CASA growth for banks to remain robust in the near term with the availability of EPF withdrawals through i-Citra under the latest economic stimulus package. This is envisaged to improve funding cost of banks positively and increase the underlying net interest margins (NIM).

• Liquidity of the banking system remained healthy based on sector LCR of 152.0% and NSFR of >100.0%.

• We maintain our OVERWEIGHT stance on the sector with top picks of CIMB (fair value RM5.60), RHB Bank (FV RM6.90) and Maybank (FV RM10.40). We like CIMB, RHB and Maybank due to the expected improvement in core operating income coming from the gradual improvement in regional operations performance, progressive improvement in underlying NIMs and provisions for loan losses. Earnings of these banks are also expected to benefit from the improved performance of their Singapore operations which in 2020 were affected by provisions (overlays and specific provisions). Also, we continue to see compelling valuations for these stocks and strong capital positions, particularly the robust capital ratios of RHB Bank.

Source: AmInvest Research - 29 Jun 2021