Even though this reporting season saw 4Q20 sector profit falling 14% QoQ and 37% YoY (given higher bad loan provision), we are not spooked since CY21 will come off a low base, with profit growing at 2-year CAGR of 21.1%. Furthermore, we saw 3 earnings beat, 4 in line, and 1 miss during the quarter. Other reasons to be optimistic with the sector are: (i) Covid-19 vaccination rollout, (ii) healing economy, and (iii) ample market liquidity. Maintain OVERWEIGHT. We have BUY ratings on Maybank, RHB, and BIMB.

4Q20 results round-up. It was a satisfactory reporting quarter where 3 out of 8 banks under our coverage exceeded expectations (Alliance, AMMB & BIMB saw better-than expected top-line growth), 4 in line (CIMB, Maybank, Public, RHB), and 1 below (Affin again booked higher-than-expected bad loan provision).

QoQ. 4Q20 sector net profit fell 14% on the back of higher impaired loan allowances (+17%). If not for this, financial performance could have been better as pre -provision profit was up 3%. This was led by top-line growth (+3%) as NIM expanded 11bp. In general, these were recurring themes seen during the quarter. However, both AMMB and CIMB made smaller provision for bad loans while BIMB posted a net writeback. As for Affin, it went into the red by chalking in huge loan loss allowances (doubled).

YoY. Similarly, the quadrupling in impaired loan provision caused sector earnings to fall 37%. However, positive Jaws absorbed some of the impact, thanks to total income growth of 4% vs opex decline of 3%. That said, BIMB bucked the negative profit trend due to net writeback of financing loss allowances. As for Affin, it incurred losses given a 6-fold rise in bad loan provision.

Other key trends. Loans growth tapered to 2.1% YoY (3Q20: +2.6%) while deposits also lost traction to 3.8% YoY (3Q20: +5.3%). Based on these two categories, the top 3 fastest growing banks were BIMB, AMMB and RHB (+5-12%). As for asset quality, GIL ratio weakened 22bp QoQ due to uptick in impairment post auto moratorium.

Outlook. We see stable NIM trends, premised on no OPR cut & benign deposit rivalry in 2021. However, loans growth is expected to stay tepid for now as Covid-19 related headwinds drag near-term showing but should gain back traction 6-12 months down the road. We anticipate GIL ratio will continue to creep upwards but we are not overly concerned as banks have already made heavy pre-emptive provisioning in FY20 and we reckon credit risk has been adequately priced in by the market, looking at the high NCC assumption applied for FY21 by both us and consensus (above the normalized run-rate but below FY20’s level). Also, we believe the Government and BNM will stay supportive in helping troubled borrowers, limiting a significant sag in GIL ratio.

Forecast. Following the upward profit revision on Alliance, AMMB, BIMB, CIMB, and RHB this reporting season, we are now projecting 2-year aggregate earnings CAGR of 21.1% (CY20-22) for the sector vs our previous estimate of 15.5%.

Maintain OVERWEIGHT. Although we are not entirely out of the woods yet, there are still reasons to be optimistic with the sector: (i) Covid-19 vaccination rollout, (ii) healing economy, and (iii) ample market liquidity, motivating ‘risk on’ appetite into stocks with recovery and deep value traits. For large-sized banks, we like Maybank (TP: RM9.20) over Public (TP: RM4.25) and CIMB (TP: RM4.50); Public’s valuation is rich, has high foreign shareholding level and low yield while CIMB is a riskier proposition given less solid asset quality. For mid-sized banks, RHB (TP: RM6.65) is preferred over AMMB (TP: RM2.95) as the latter has to contend with negative perception issues. For small sized banks, BIMB (TP: RM5.00) is favoured vs Affin (TP: RM1.85) and Alliance (TP: RM2.90), for its positive long-term structural growth drivers and better asset quality.

Source: Hong Leong Investment Bank Research - 8 Mar 2021