• Bank Negara Malaysia expects a recovery to take place in the economy in 2H20, with the trajectory now being more optimistic.

• Decline in the take-up rate of the automatic loan moratorium from 90% (for individuals and SMEs) to 85%, a positive sign on improving cashflows.

• At this juncture, we reiterate our UNDERWEIGHT stance on the banking sector, as we do not think that the sector is completely out of the woods yet. Major concerns are the risk of a prolonged unemployment trend and business closures.

Dialogue with Bank Negara on 23 July

BNM hosted an engagement session with analysts on the 23rd of July 2020, and the session addressed concerns relating to financial stability of the country. Overall, we sense that BNM is optimistic of an economic recovery in 2H20, while the banking sector continues to be supported by ample liquidity and strong capital buffers, as well as robust debt-service-ratios of households/businesses.

Decline in moratorium take-up rate a positive sign on improving cashflows

One of the positive key takeaway from the session was the take-up rate of the loan moratorium by households and SMEs, which was at 90% since the commencement in April20, and has declined to 85% recently. In our view, this is a positive sign of improving cashflows of households and SMEs subsequent to the re-opening of the economy. Nonetheless, we continue to await for more positive indicators ahead on the banking sector’s asset quality, prior to any potential earnings revisions.

Targeted assistance to be offered to those facing repayment issues

BNM guided that the upon expiry of the automatic loan moratorium by end-Sept20, banks will not be extending this further but will continue to offer targeted financial assistance in the form of ‘restructuring and rescheduling’ (R&R) to borrowers who continue to face repayment issues. In the meantime, loans which are subject to R&R will not be classified as ‘impaired’ for genuine cases, i.e. borrowers facing temporary restraints on their cashflows. Nonetheless, MFRS 9 will remain applicable whereby loans will be subject to the staging process (Stage 2 & 3). Hence, in our view, banks‘ expected credit losses (ECLs) will remain elevated in 2020-21 and will be driven by economic conditions in the country. At this juncture, we continue to be wary of further rise in business foreclosures, especially for higher risk sectors such as the tourismrelated, wholesale & retail, airlines-related, construction, real-estate and manufacturing.

Debt-service-ratio (DSR) remains robust at households/businesses

BNM also indicated that the DSR remains robust in the system, with businesses at 4.2x as at 1H20 (vs. 4.6x as at 2H19). The household sector’s DSR remains relatively stable thus far, being at 37% as at Dec19.

Rigorous stress-testing as one of the key criteria for banks’ dividend payment

BNM would not impose a ‘blanket restriction’ on banks’ dividend payments, but guided that it would be subject to each individual banks’ stress-testing by BNM. Key criteria includes a bank’s profitability prospects as well as its capital buffers. As at May20, the banking sector had a CET1 ratio of 14%, while the LCR stood at 140%.

Maintain UNDERWEIGHT on the banking sector

We maintain our sector UNDERWEIGHT call, as we do not think that the banking sector is completely out of the woods yet. Though we expect a 13% yoy recovery in sector core net profit in 2021E, this is subsequent to a drastic decline of 28.6% yoy in 2020E. In our view, the banks’ balance sheet and liquidity will be subject to more stress in 2020-21E due to the moratorium period offered to borrowers as well as higher risk of defaults as economic circumstances remain uncertain. That said, we still take comfort in the strong capitalization levels (CET1 ratio at 14% as at May20 and Total Capital Ratio at 17.7% as at May20) while the capital buffer (in excess of regulatory requirement) of RM121bn as at Feb20, remains fairly robust.

Based on our assumptions for the banking sector for 2020E, we are expecting: i) system loans to decline 1% yoy; ii) NIM of 1.93% (with 4 rate cuts in 2020); iii) net credit cost at 56bps; and iv) CIR at 48%.

Our preferred stock pick is Aeon Credit (ACSM MK, BUY, TP RM12.70 based on 13x CY21E EPS). We believe that there is a value proposition in Aeon Credit as we look to a recovery year in FY22E, with receivables growth of 9% yoy (vs. -3% yoy in FY21E) and a lower net credit cost of 304bps (vs. 358bps in FY21E). AEON Credit remains a key player in consumer financing through credit cards, personal financing, motorcycle financing and used-car financing. Its 'value-chain transformation project' comprises: i) online loan applications/ approvals; ii) a B2C2B digital marketing strategy; iii) the use of AI in its credit assessment model; and iv) process automation to help boost top-line growth and enhance operating efficiency. Aeon Credit's high ROE of 15.8% in FY22E is underpinned by the use of leverage and ability to generate an EIR at 16-17%, vs. traditional banking players at 5%.

Source: Affin Hwang Research - 24 Jul 2020