We are glad that the banking system has sufficient buffers to withstand extreme stresses. From BNM’s updated stress tests, CY22-24 cumulative credit losses could come up to RM41.7bn but CET1 ratio is still expected to stay comfortably above regulatory minima at 14.5%. In our view, the sector’s risk-reward profile remains skewed to the upside as valuations are undemanding and OPR upcycle will benefit banks. Retain OVERWEIGHT; BUY ratings include: Maybank, Public, RHB, BIMB, Affin.

Yesterday, BNM published its 2H21 Financial Stability Review Report. In this write-up, we collated the key highlights relevant to the banking sector.

Capable of taking hits. Despite continued uncertainty posed by domestic and global developments, our banking system stayed resilient and was able to support financing activities for sustained economic recovery; this is thanks to ample capital and liquidity buffers: (i) strong CET1 ratio of 15.0% (2020: 15.2%) coupled with (ii) robust LCR of 151.9% (2020: 148.2%). Separately, from BNM’s updated stress tests, we understand that cumulative credit losses could come up to RM41.7bn over CY22-24 with GIL ratio rising to 6.6% from 1.4%. As such banking system earnings could fall >30% but CET1 ratio is still projected to remain comfortably above regulatory minima at 14.5%; almost all banks are able to maintain their capital ratios above internal targets, but up to 25 of them (out of 53) are expected to record annual losses during the stress test horizon and only 2 are seen to decline beneath the minimum regulatory capital requirement (thankfully, the duo only makes up 0.5% of total banking system assets).

HH borrowers still in good shape. Total household (HH) debt-to-GDP fell to 89.0% (2020: 93.2%), thanks to quicker GDP growth. We note that HHs were still borrowing within their means where the median debt service ratio for outstanding/new loans are 35%/44% respectively (2020: 35%/43%). Also, aggregate financial asset-to-debt ratio stood at 2.2x (flattish vs 2020) and if only liquid financial asset is considered, the debt cover is 1.5x (2020: 1.5x). Even though HH repayment assistance (RA) take-up rate has shot up to 36% in 2H21, it has declined in Jan-Feb 2022, based on our channel checks, following expiry of the PEMULIH program; repeat RA HH borrowers with DSR >60% and slower income recovery (higher risk in nature) accounted for only 1.7% of banking system loans. As for URUS, only 5.7k individuals with total loan exposure of RM2.7bn (or 0.1% of total system loan) have enrolled into the program (as at 4th Mar).

Biz have gotten better. For businesses (Biz), interest coverage ratio has improved to 7.5x (2020: 5.1x), debt-to-equity ratio dropped to 21.8% (2020: 22.6%) and the cash to-short-term-debt ratio remained stable at 1.4x (2020: 1.4x). Also, the share of firms at-risk (4Q21: 20.9%) continued to decrease from earlier peak (3Q20: 31.9%) but was still higher than pre-pandemic levels (2015-19 avg: 21.4%). At end Dec-21, 36.5% and 17.7% of outstanding SME and non-SME loans were under RA, rising from 21.6% and 17.2% respectively in Jun-21. Despite sharp jump in SME RA, new R&R applications here have, however, moderated significantly from its peak in Jul-21 (see Figure 4).

Maintain OVERWEIGHT. We believe the sector’s risk-reward profile is skewed to the upside as valuations are undemanding and we are only at the cusp of an OPR hike upcycle with economic recovery, which benefit banks. As such, we remain bullish and employ a rather broad stock buying strategy in 1H22. For large-sized banks, we like Maybank (TP: RM9.40) for its strong dividend yield and Public Bank (TP: RM4.80) for its large potential headroom to perform management provision overlay writebacks. For mid-sized banks, RHB (TP: RM7.00) is favoured for its high CET1 ratio and attractive price-tag. As for small-sized banks, BIMB (TP: RM3.45) and Affin (TP: RM2.35) are preferred; we like the former for its positive structural growth drivers and better asset quality while the latter has special dividends potential and strong financial metrics.

Source: Hong Leong Investment Bank Research - 31 Mar 2022