• In our view, the earnings impact on the banking sector of the two-week MCO period (13-26 Jan 2021) is likely to be manageable; nonetheless, any extension beyond a three-month period could pose a negative risk of >6%, in our view.
• Though we maintain 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%, these are however subject to revisions in GDP and unemployment rate projections.
• We reiterate a NEUTRAL rating on the Banking Sector. Downside risks – further deterioration in business conditions and asset quality. Upside risks – interest rate hikes, effective control of the COVID-19 pandemic.

Reiterate NEUTRAL; Earnings Outlook Maintained Despite MCO 2.0

We reiterate our NEUTRAL rating on the banking sector and maintain our 2021E outlook, expecting a 16% yoy recovery despite the reinstatement of the two-week Movement Control Order (MCO 2.0). At this juncture, we think the earnings impact on the banks will likely be manageable. Our economist is of the view that MCO 2.0 could shave 0.7ppts off Malaysia’s GDP this year, while downside risk could potentially be mitigated by a fiscal stimulus response. That said, our sector view remains unchanged and we believe that the banks continue to face uncertainties posed by the group of vulnerable borrowers - those under the ‘targeted repayment assistance’ program.

MCO 2.0 to Impact Property, Retail and Hospitality Sectors

Based on feedback gathered from Affin’s sector analysts, the impact from MCO 2.0 is not expected to be as severe as last year’s MCO which ran from 18 Mar-12 May 2020. Business activity which will be adversely affected this time are property (closure of sales galleries), retail (non-essential services, i.e. fashion, 4D outlets, hair salons, spas), hospitality (due to restriction of travelling) and non-essential manufacturing. In our view, banks have been cautious of these high-risk segments and had set aside some preemptive provisions to account for potential deterioration in asset quality.

Risk-on Risk-off Continues to Drive Volatile Prices in Banking Stocks

We note that shifts in investors’ expectations continue to drive ‘risk-on risk-off’ in the market and as such banking stocks have been notably volatile. Just a month ago, the banking sector was trading at a CY21E P/BV multiple of 1.1x (as at the date of our report issued on 17 Dec 2020) vs. a P/BV multiple of 1.02x today We think investors should lock in gains whenever opportunities arise as banks’ earnings could be subject to downside risks from higher provisions and consensus downgrades (given changes in macroeconomic expectations).

Source: Affin Hwang Research - 19 Jan 2021