KLFIN ended 1H21 on a fairly flat note after a series of up-and-downs. In 2H21, we see some uneven profit recovery but overall FY21 sector bottom -line is still projected to bounce back by 21% (FY20: -24%) mainly from lower provision for impaired loans. Also, we believe the market has adequately priced in cre dit risk. In our opinion, there are reasons to be optimistic with banks given: (i) Covid-19 adversities will likely fizzle out in late 2021, (ii) valuations are attractive, and (iii) market liquidity is ample. Maintain OVERWEIGHT.

On a roller coaster ride. KLFIN ended 1H21 on a fairly flat note after a series of up and-downs. The new wave of local Covid-19 outbreak did not really dampen investors’ sentiment & buying interest returned towards tail-end as banks posted strong financial results in mid-May. On a relative basis, CIMB (+8%) was the best performer given its sharp earnings rebound while AMMB (-19%) was the weakest because of a surprise global settlement with the MoF for its past involvement in the 1MDB scandal.

Speed bumps ahead. Although banks started 1Q21 promisingly (+22% YoY), we see some uneven profit recovery over the next 3 quarters as: (i) large investment-related gains may start to fizzle, (ii) most FD have been repriced down and CASA growth may taper from a high base, and (iii) loan loss provision may pick up steam again due to more potential trouble borrowers burgeoning from an extended MCO. Despite these, the overall FY21 sector profit is still projected to bounce back and rise by 21% from -24% in FY20 (low base effect); also, sector ROE is seen increasing to 8.3% (+80bp).

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 have ample capital, liquidity, and loss buffers. We understand they have the capacity to withstand default rates that are 8x higher than normalized levels. With these in mind, we think an extended MCO would not materially drive up FY21-22 sector NCC higher vs what we have already built into our forecasts. On top of that, we believe troubled borrowers would stay largely similar to before and thus, we do not expect to see a meaningful uptick in targeted assistance as a % of outstanding loan exposure. Moreover, the heavy pre-emptive provisioning carried out by banks last year have not been utilized.

Undemanding price points. The sector is still trading close to -1.0SD to both its 5- year and 10-year average P/B (at 1.0x). 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 reckon it should now trade closer to its 5- year mean P/B given the worst of Covid-19 crisis could be over but ROE stays fairly 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.

Maintain OVERWEIGHT. We believe the sector’s risk-reward profile is skewed to the upside as most negatives would have been considered by the market. In our opinion, Covid-19 adversities will likely abate in late 2021 while the state of the economy and banking sector will only get better in time. Thus, any price weakness is an opportunity to accumulate. Nevertheless, to err on the side of caution, we employ a stock picking strategy in 2H21. 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 and 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 - 5 Jul 2021