• In our recent Market Strategy (issued on 2 Sept), we upgraded our banking sector weighting from UNDERWEIGHT to NEUTRAL. Our financial sector preferred pick is AEON Credit (BUY, TP RM12.30).
• Though the worst quarter in the past 10-year earnings cycle is over, as banks accounted for more provisions and impact of the ‘mod-loss’, the earnings recovery in 2021 may not be able to match that of 2017-19.
• 2020 key assumptions: i) domestic loan growth +2.5% yoy; ii) NIM at 1.93% (with 125bps rate cut and the ‘mod-loss’ impact); iii) net credit cost at 70bps; and iv) CIR at 50%. Downside risks – a prolonged unemployment trend and further rise in business closures. Upside risks – interest rate hikes.

Sector Weighting Upgraded From UNDERWEIGHT to NEUTRAL

We have upgraded our Banking sector weighting from UNDERWEIGHT to NEUTRAL as we believe that the correction in share prices has reflected the worst quarterly earnings for the sector. CIMB Group is the only stock with a SELL rating in our sector universe, while the rest are HOLDs. Overall, our views on the sector have not changed much from the last quarter; we remain cautious of a meaningful recovery in sector earnings in 2021 as core ROE may remain subdued, our 2020E/21E forecasts are at 6.5%/7.5% vs. 10-11% during 2015-2019. Our preferred pick in the Financial sector remains AEON Credit, which we rate BUY with a RM12.30 TP.

Earnings recovery in 2021 may still be shaky due to asset quality risks

Potential migration of loans to Stage 2 and Stage 3 classification in the banks’ loan books remain a risk going into 2021, as more borrowers may come forth asking for further extension of the moratorium and ‘restructuring and rescheduling’ of their outstanding loans. With the risk of weaker household incomes, a prolonged unemployment trend and deterioration of businesses’ debt-servicing capacity, banks may continue to face asset quality risks posed by vulnerable sectors such as tourism, O&G, logistics, retail and commercial property sectors. In addition, Maybank and CIMB continue to face threats of more NPLs from Indonesia.

Recent 2Q20 financial results saw core net earnings -44% yoy and -32% qoq

The key domestic banks reported a total core net profit of RM3.73bn in 2Q20, representing a 31.7% decline qoq and 44% decline yoy, with CIMB (-45.4% qoq; -81.6% qoq) and Maybank (-54% qoq; -51.5% yoy) seeing the biggest decline in net profits compared to other banks, largely impacted by a spike in provisions and the modification loss (‘mod-loss’). Three key trends which were seen this quarter: i) banks have held back the interim dividends; ii) all banks announced the impact of the ‘mod-loss’; and iii) all banks have stepped-up their proactive provisions to boost expected credit loss buffers.

Source: Affin Hwang Research - 14 Sept 2020