BNM announced a slew of new measures to assist borrowers affected by Covid- 19. Although banks’ cash flow will be briefly affected, the drawdown of some prudential buffers can help to maintain their business operations; P&L impact is limited. Aside from this, asset quality can be sustained over the next 6 months but after that it could wane due to the potential economic hangover post Covid- 19. Regardless, we still find that near-term headwinds are being balanced out by the sector’s inexpensive valuations (P/B is now below -2SD and GFC’s level). Retain NEUTRAL and we like banks that were acutely bashed down; preferred picks are CIMB (TP: RM4.70) and Alliance (TP: RM2.50). Other BUY ratings are RHB (TP: RM5.40) and BIMB (TP: RM3.70).

NEWSBREAK

Bank Negara Malaysia (BNM) announced slew of new measures to assist borrowers affected by Covid-19. Key actions include:

i) Automatic 6-month loan moratorium to all consumer and SME borrowers from 1st April (this excludes credit card balances); those who are not keen can opt out.

ii) Credit card balances of borrowers can be converted to term loans of not more than 3 years with interest cap of 13% p.a.

iii) Corporate borrowers can request for the 6-month loan moratorium to help preserve jobs.

iv) Rescheduled & restructured (R&R) loans need not be classified as credit-impaired

v) Banks are allowed to: (i) drawdown capital conservation buffer (CCB) of 2.5%, (ii) operate liquidity coverage ratio (LCR) of below 100%, and (iii) reduce regulatory reserves (RR) to 0%.

vi) The net stable funding ratio (NSFR) implementation will continue to be effective on 1 July but the minimum requirement is lowered to 80% from 100%.

vii)The 6-month loan moratorium provided to borrowers should not automatically result in a stage transfer under MFRS 9.

HLIB’s VIEW

Cash flow. While BNM is trying to blunt the impact of Covid-19, banks may come in as slight losers. We believe the automatic 6-month loan moratorium to all consumer and SME borrowers will affect their cash flow; this is because both the loan principal and interest need not be serviced temporarily. Thankfully, BNM has allowed the drawdown of some prudential buffers to aid its initiative. From our estimates, banks under our coverage are able to cover their potential cash outflow over the next 6 months - assuming they can deploy all of their cash balances.

Asset quality. Although the above move can help to prevent deterioration in asset quality, after the 6 months mark, however, borrowers will then have to contend with the economic hangover post Covid-19; this in turn, may subsequently affect asset quality. That said, the spike in net credit cost (NCC) can be somewhat stifled as some provisioning on moratorium loans can remain in stage 1 and do not need to be fully converted to stage 2; we estimate that every 1bp increase in NCC could reduce sector earnings by 0.5%.

Other matters. From our channel checks, interest income will be continued to be accrued while all banks under our coverage have LCR and NSFR of above 100%.

Forecast. Unchanged as our preliminary assessment on P&L shows limited impact.

Retain NEUTRAL as near-term headwinds are being balanced out by the sector’s inexpensive valuations. We like banking stocks that were acutely bashed down and especially those with P/B below 1.00x, GFC’s trough, and -2SD; two of our BUY calls meeting this criteria are CIMB (TP: RM4.70) and Alliance (TP: RM2.50), making them our preferred picks. Other BUYs are RHB (TP: RM5.40) and BIMB (TP: RM3.70).

Source: Hong Leong Investment Bank Research - 31 Mar 2020