Fairly inspiring reads across 1Q21 reporting period as sector earnings rose 57% QoQ & 22% YoY; contributors were better total income growth & lower loan loss provision. Overall, there were 4 earnings beat, 1 in line & 3 misses. We continue to see recovery in FY21-22 with profit growing at 2-year CAGR of 16.6%. Despite the nationwide lockdown, we remain optimistic on the sector given: (i) Covid-19 vaccination rollout, (ii) undemanding valuations, and (iii) ample market liquidity. Retain OVERWEIGHT; BUY calls include: Public, Maybank, RHB, BIMB & Affin.

1Q21 results round-up. This reporting season was a mixed bag as 4 out of 8 banks under our coverage trumped expectations (Maybank, Public & RHB saw better-than expected NIM while CIMB surprised with stronger NOII), 1 in line (BIMB), and 3 below (AMMB, Alliance & Affin booked in higher-than-expected bad loan provision).

QoQ. 1Q21 sector net profit rose 57% on the back of lower impaired loan allowances (-38%) & positive Jaws (total income growth outstripped opex by 2ppt); this was led by widening NIM (+8bp) & loans growth (+1%). In general, the trends above were broadly observed during the quarter. However, Alliance was bogged down by poor investment showing, higher personnel & admin costs. Separately, AMMB saw NIM contraction & higher loan loss provisions. Lastly, BIMB was dragged by higher opex, bad financing allowances, and effective tax rate.

YoY. Similarly, positive Jaws created by total income growth (+8%) against relatively flat opex, helped sector earnings to jump 22%; NOII grew 9%, loans expanded 4% & NIM broadened 10bp. Also, there was only a mild tick-up in loan loss provision (+2%). Outliers that showed profit shrinkage were: Affin (negative Jaws from poor investment income), Alliance (negative Jaws from higher project-related personnel costs), AMMB (spiked in provision for bad loans), and BIMB (negative Jaws from weak top-line).

Other key trends. Both loans and deposits growth gained momentum to 3.8% (4Q20: +2.1%) & 6.9% YoY (4Q20: +3.8%) respectively. Based on these two categories, the top 3 fastest growing banks were BIMB, RHB & AMMB (+6-12%). As for asset quality, it was resilient as GIL ratio trended down 8bp sequentially.

Outlook. We expect NIM to remain stable premised on no OPR cut & benign deposit rivalry in 2021. Also, loans growth is seen to chug along given slower repayment vs disbursement activities from targeted assistance, extension of HOC & SST exemption on car sales. That said, GIL ratio is likely to creep up but we are not overly concerned as banks have made heavy pre-emptive provisioning in FY20 & we reckon credit risk has been adequately priced in, looking at the high NCC assumption applied for FY21 by the market (above the normalized run-rate but below FY20’s level).

Forecast. After the slew of profit revision this reporting season, we are now projecting 2-year aggregate earnings CAGR of 16.6% (CY20-22) for the sector vs our previous estimate of 14.3%.

Retain OVERWEIGHT. Even with the nationwide lockdown, we remain optimistic on the sector considering: (i) Covid-19 vaccination rollout, (ii) undemanding valuations (at -1.5SD 5-year mean P/B), and (iii) ample market liquidity (which we believe will soon again motivate ‘risk on’ appetite into stocks with recovery, reopening, and deep value traits). For large-sized banks, we like Public (TP: RM4.50) for its defensive qualities in uncertain times & Maybank (TP: RM9.40) for its superior yield. For mid-sized banks, RHB (TP: RM6.85) is favoured for its high CET1 ratio & large FVOCI reserve to buffer volatile yield curve. For small-sized banks, BIMB (TP: RM5.20) & Affin (TP: RM2.15) are preferred; we like the former for its positive long-term structural growth drivers and better asset quality while the latter has value unlocking potentials.

Source: Hong Leong Investment Bank Research - 4 Jun 2021