• We reiterated our NEUTRAL rating on the banking sector in our recent Market Strategy (issued on 11 December). In this report, we further adjust our target prices higher in-line with recent multiple re-ratings. Our financial sector top pick is Aeon Credit.
• Though the worst quarter in the past 10-year earnings cycle is over, the expected earnings recovery of 16.3% yoy in 2021 is nothing to shout about, given a still subdued banking sector ROE of 7.9% (vs. 15% in 2010-11).
• Our 2021 assumptions: i) system loan growth of 3.5% yoy (2020E: 3.5%); ii) NIM at 2.03% (2020E: 2.0%); iii) net credit cost of 62bps (2020E: 81bps); and iv) CIR at 47%. Downside risks – a prolonged unemployment trend and further deterioration in asset quality. Upside risks – interest rate hikes.

Reiterate NEUTRAL, Though Raising 12-month Target Prices

We reiterate our NEUTRAL rating on the banking sector and raise the target prices in our stock universe, subsequent to the multiple re-rating due to investor optimism in the market. Ample market liquidity (due to low interest rates) despite the expiry of the loan moratorium in September, and a correction in the market (in September), have been drivers for investors looking for better returns and recovery-themed plays (such as the banking sector). In spite of that, our sector view has not changed and we believe that the banks are not completely out of the woods yet, given the risk of potential defaults by vulnerable borrowers, which, as of today, are not classified as ‘under-performing’.

Banking Sector P/BV Multiple Recovered to 1.1x From a Low of 0.8x

With reference to the GFC, the banking sector reached a trough P/BV multiple (1.2x) in April 2009 and subsequently recovered to 2.0x P/BV by end-2010 (taking a period of 21 months). Likewise, we believe that the banking sector had reached its trough at 0.8x P/BV in October 2020 (coinciding with the expiry of the loan moratorium in September), and could embark on an uptrend (currently at 1.1x 2021E), though the recovery could be met with headwinds (such as political uncertainty or any negative economic data).

3Q20 Financial Results: Core Net Earnings Recovered 41.7% Qoq

The key domestic banks reported a total core net profit of RM5.28bn in 3Q20, recovering by 41.7% qoq but down on a yoy basis by 18%. Overall, 3Q20 results were above our expectations, due to significantly better results from Maybank and Public Bank. During 3Q20, most banks raised their provision buffers further qoq (with the exception of Maybank, HLB and RHB Bank) and raised the net credit cost guidance for 2020. NIM continued to recover qoq given the repricing down of deposit costs in absence of the hefty Day-1 ‘mod-loss’ impact. Public Bank was the best performer, delivering the highest ROE among the banks in our universe.

A Sector Re-rating Fuelled by Optimism

Reiterate NEUTRAL, Though Raising Target Prices

We reiterate our NEUTRAL rating on the banking sector and are raising target prices in our stock universe, subsequent to the price multiple re-rating underpinned by strong investor optimism. We believe that the upbeat market sentiment of an economic recovery in 2021 was driven predominantly by: i) the FDA’s emergency approval of Pfizer’s Covid-19 vaccine as well as the successful trials of more vaccines in the market; ii) ample market liquidity due to the prevailing low interest rates (despite the expiry of the loan moratorium in September); and iii) an opportunity to re-enter the market after a correction in September (triggered by the expiry of the loan moratorium). Hence, it is not surprising for investors looking for better returns and recovery-themed plays to target banking stocks. In spite of the market optimism, our sector views have not changed and we believe that the banks are not completely out of the woods yet given the risk of potential defaults by vulnerable borrowers (individuals, SMEs and corporates). This segment of borrowers are not yet classified as ‘under-performing’ as at today (and will not appear in the CCRIS system) due to the exemption granted by Bank Negara (part of a Covid-19 relief measure).

Fig 1 below highlights our current stock ratings and changes (along with the basis) in Target Prices for our banking/financial universe. We have retained our stock ratings but have lowered our cost of equity assumptions (which resulted in higher P/BV multiples derived from the Gordon Growth Model). Hence, this led to higher target prices for our banking universe.

Source: Affin Hwang Research - 17 Dec 2020