Though the Malaysian banking sector continues to be backed by resilient and strong fundamentals such as a high capital buffer of RM121bn (7.38% of RWA), ample liquidity, a manageable gross impaired loan ratio and healthy loan loss cover, the sector is facing more headwinds now given a recessionary environment in 2020, with the risk of contraction in credit growth and deteriorating asset quality (as default rates may rise after the 6-month moratorium period expires). In addition, a few key banks’ exposure to the oil & gas sector may pose downside risks as the oil price stays low. We are forecasting a 20.6% yoy decline in the 2020 sector EPS. Maintain UNDERWEIGHT. Our preferred pick is ELK-Desa.

Summary of Key Takeaways From 2H19 Financial Stability Review

Based on BNM’s 2H19 Financial Stability Review, the key takeaways are: - i) the Malaysian banking sector’s capital buffer of RM121bn (Feb20; ~7.38% of RWA), in excess of regulatory requirement, implies a high loss-absorbing capacity; ii) BNM views the potential deterioration in loan performance of households and businesses as within the financial buffers of banks; iii) the banking sector liquidity and funding conditions remain supportive of intermediation activities, as implied by the loan-to-fund (LTF) and loan-tofund-and-equity (LTFE) of 83.2% and 72.9% (as at Dec19) respectively; iv) households continue to exhibit a high debt repayment capacity, based on the financial asset-to-debt ratio of 2.2x and liquid financial asset-to-debt ratio of 1.4x as at Dec19.

Banking Sector Outlook in 2020 to be Dampened by COVID-19 Stress

A contraction in loans growth is expected for 2020, coming from the auto, residential property, commercial property and trade financing segments. Banks continue to face asset quality risks from their O&G portfolio, largely big ones such as Maybank, CIMB, RHB and AMMB. Dividend restrictions may potentially be triggered if BNM decides to take a more cautious stance.

Maintain Sector UNDERWEIGHT

We maintain our sector UNDERWEIGHT call, given the heightened downside risk. We forecast a decline in sector core EPS of 20% yoy in 2020, and a modest growth of 1.5% yoy in 2021. Our top pick is ELK-Desa (ELK MK, RM1.16, HOLD) due to its attractive yield and resilient business of autofinancing for the mass market.

Source: Affin Hwang Research - 6 Apr 2020