KLFIN is poised to end strong in 2H20 as investors were in ‘risk on’ mood amid Covid-19 vaccine discovery. In 2021, we can look forward to profit improvement of 21% vs (FY20: -27%) from: (i) subsiding NIM pressure, (ii) tight cost control, and (iii) less intense pre-emptive provisioning efforts. Moreover, we believe the market has adequately priced in credit risk. Overall, there are motivations to be optimistic with banks given: (i) undemanding valuations, (ii) healing economy, and (iii) ample market liquidity. Maintain OVERWEIGHT.

Going out with a bang. KLFIN is poised to finish strong in 2H20 as investors were in ‘risk on’ mood amid Covid-19 vaccine discovery. Hence, all banks displayed positive returns; on a relative basis, Alliance (+34% in 2H20) was the best performer given the attractiveness of its price point before running up (traded at GFC level) while Maybank (+19%) was the weakest due to its better price showing in 1H20.

Brighter days ahead. Although the first 3 quarters of 2020 have been rough, we see 4Q20 to begin delivering some sequential profit improvement from: (i) subsiding NIM pressure, (ii) tight cost discipline, and (iii) less intense pre-emptive provisioning efforts. Overall, FY21 sector profit is projected to bounce back and rise by 21% from -27% in FY20; also, sector ROE is seen expanding to 7.7% (+60bp).

Covid-19 vaccine fuelling optimism. We believe certainty of an economic recovery has increased, since leading Covid-19 vaccines have high efficacy rates, indicating a step closer to winning the war against the virus. We are forecasting 2021 GDP growth of 6.0% YoY, a rebound from the estimated 2020 decline of -5.5% YoY. Besides, our base case assumption for Covid-19 inoculation to reach a decent local population size (c.20%) by end-2021 and a more meaningful level (c.50%) by end-2022.

Well-equipped for rainy days. We believe the market has adequately priced in credit risk as conservative credit cost estimates were baked into our financial models, in line with BNM’s updated stress test results. Also, banks entered the laborious phase from a position of strength. We understand they have enough buffers to withstand default rates that are 8x higher than normalized levels; this is more severe than our worst experience during the AFC where impairments rose 3-5x from initial stages.

Undemanding price points. The sector is still trading close to -1SD to both its 5-year and 10-year mean P/B (at 0.98x). Also, it is beneath the GFC bottom of 1.14x. Recall, back during the GFC recovery phase, it rallied 3SD notches and peak at +2SD above its 10-year mean P/B. However, we think it should now trade closer to its 5-year mean P/B given the worst of Covid-19 crisis is over but ROE remains relatively depressed. On a more bullish scenario, the sector may rally to as high as +1SD above its 5-year mean P/B, if it mimics the historical GFC valuation recovery trend.

Valuation & stock calls. We cut our COE assumption by 25-100bp for all the banks under coverage to factor in: (i) Covid-19 vaccine discovery, (ii) healing economy, and (iii) ample market liquidity. Accordingly, we are pricing them ranging from 5-year P/B of +1SD to -1SD. As such, TPs were raised but there were no changes in stock calls.

Maintain OVERWEIGHT. For large-sized banks, we like Maybank (TP: RM9.45) over Public (TP: RM21.70) and CIMB (TP: RM4.35); Public’s valuation is steep, has higher foreign shareholding and lower dividend yield while CIMB is a riskier proposition given less solid asset quality. For mid-sized banks, we prefer RHB (TP: RM6.55) and AMMB (TP: RM4.05) for undemanding valuations. For small-sized banks, BIMB (TP: RM4.80) is favoured vs Affin (TP: RM1.90) and Alliance (TP: RM3.00), for its positive long-term structural growth drivers and better asset quality.

Source: Hong Leong Investment Bank Research - 14 Dec 2020