The targeted loan moratorium extension and bank assistance is consistent with what banks been mulling to do after Sep-20. Hence, this did not come as a large surprise. Overall, we believe it is a more sustainable method to help the Rakyat and also, restrain short-term NPL from ballooning out of control. However, it may hide actual damage and cause a lag in NPL formation if the situation does not improve or an advent of Covid-19 second wave paralyses the country again. That said, Covid-19 related headwinds are being balanced out by the sector’s undemanding valuations (P/B close to -2SD and lower than GFC’s level). Retain NEUTRAL and RHB (TP: RM5.80) is the only bank we like, mainly for its strong CET 1 ratio, relatively large untapped FVOCI reserves, and deflated valuations.

NEWSBREAK

Prime Minister Tan Sri Muhyiddin Yassin announced that the Government has agreed to extend the loan moratorium and banks will provide targeted assistance, specifically to those who need it:

i) Lost job and still unemployed, moratorium is extended by another 3 months and it can be further lengthened at the discretion of banks.

ii) Still working but income got cut (no thanks to Covid-19), loan repayment to be reduced by a similar % for 6 months and can be revised depending on salary .

iii) For others (depending on situation), aid include interest payment only, lengthen loan tenure, and other forms of financial reliefs.

iv) As for hire purchase, banks to offer affordable repayment schedule (e.g. lengthen tenure to lower monthly instalment).

HLIB’s VIEW

Short-term gain, long-term pain? The targeted loan moratorium is consistent with what banks have been mulling to do after Sep-20. Hence, this did not come as a surprise. We believe it is a more sustainable method to help the rakyat and also, restrain non-performing loan (NPL) from ballooning out of control over the short-term. However, it may hide actual damage and cause a lag in NPL formation if the situation does not improve rapidly or an advent of Covid-19 second wave paralyses the country again. Besides, the quantum of new modification loss should be lower than the prior blanket automatic deferment as this is aimed towards a smaller audience; Finance Minister Tengku Zafrul shared the banking sector suffers RM1.06b n of MFRS losses for every month the automatic moratorium is in place.

Banks’ liquidity should not be a concern as the above measures are nowhere near as harmful as the automatic loan moratorium. Moreover, sector’s liquidity coverage ratio remains robust at 140% (more than the minimum requirement of 100%). Even if necessary, banks can always resort to tap the bond market to raise funds, especially when current interest rate environment is low.

Forecast. Unchanged as this is largely similar to what banks have planned to do.

Retain NEUTRAL. Near-term Covid-19 related headwinds are being balanced out by the sector’s deflated valuations. For exposure, the only bank that we like now is RHB (BUY, TP: RM5.80) given its appealing risk-reward profile, backed by undemanding valuations, strong CET1 ratio of 16.6% (sector: 14.0%), and relatively large untapped FVOCI reserves. On the other hand, we have SELL ratings on Public (TP: RM14.80) and Affin (TP: RM1.55) for rich valuations and lacking the economies of scale to vie, respectively.

Source: Hong Leong Investment Bank Research - 30 Jul 2020