Banks have agreed to provide 6-mth loan moratorium to all consumer & micro SME borrowers. However, it will be on an opt-in model, unlike the 1st automatic loan deferment. Hence, we believe there is unlikely to have significant impact to banks and in any case, day 1 modification loss is a non-cash accounting entry & is gradually reversible in the future. Thus, we are treating it as an exceptional item. Overall, we expect negligible price reaction on the above development and price weakness is an opportunity to accumulate. Maintain OVERWEIGHT; BUY calls include: Maybank, Public, RHB, BIMB & Affin.

NEWSBREAK

Banks have agreed to provide 6-month loan moratorium to all consumer (B40, M40 or T20) & micro SME borrowers. When applying from 7 th July onwards, they do not need to present any supporting documents to demonstrate loss of income or employment. This will be based on an opt-in model & differs from the 1st automatic loan deferment, where borrowers must opt-out themselves if unkeen.

HLIB’s VIEW

Unlikely to have significant impact to banks, considering this is an opt-in model, which may deter non-affected borrowers to exploit this relief vs the 1st automatic loan moratorium. In our view, troubled borrowers would remain largely similar to before and thus, we do not expect to see a meaningful uptick in targeted assistance as a % of outstanding loan exposure. From our channel checks, the level of targeted repayment assistance take-up rate has stabilized over the past 1 quarter and is currently beneath 15%, better vs banks’ initial average guidance of 15-20%.

As such, we believe any MFRS 9-related day 1 modification loss should be lower than the prior blanket automatic loan deferment. Also, we would expect a partial offset from the unwinding impact from the 1 st loan moratorium. During the last round, the banking sector suffered RM1.06bn of MFRS losses for every month the loan deferment was in place, according to the Government. From the 1 st modification loss booked in 2Q20, Affin and CIMB chalked most losses relative to their earnings base, while Alliance and Maybank were least affected.

Forecast. Unchanged as day 1 modification loss is a non-cash accounting entry and is gradually reversible in the future. Thus, we are treating it as an exceptional item.

Retain OVERWEIGHT. We see negligible price reaction on the above development. Recall, back in late Mar-20 and early May-20, when BNM announced the automatic 6- mth loan moratorium and banks agreed to waive the additional hire purchase interest charge on borrowers (upon request by the MoF), on both occasions the KL Finance Index continued to trade sideways. In any case, price weakness is an opportunity to accumulate. In our view, Covid-19 adversities will likely abate in late 2021 while the state of the economy and banking sector will only get better in time. For large-sized banks, we like Maybank (TP: RM9.40) for its strong dividend yield offering, and Public Bank (TP: RM4.50) for its defensive qualities, over CIMB (TP: RM4.60). For mid -sized banks, RHB (TP: RM6.85) is favoured more than AMMB (TP: RM2.85) as the former has a higher CET1 ratio & also, larger FVOCI reserve to buffer against potential yield curve volatility. For small-sized banks, BIMB (TP: RM5.20) and Affin (TP: RM2.15) are preferred over Alliance (TP: RM2.80); we like the former given its positive long-term structural growth drivers and better asset quality while the latter has value unlocking potentials.

Source: Hong Leong Investment Bank Research - 29 Jun 2021