• We have raised the banking sector’s rating to OVERWEIGHT in our Market Strategy report, issued on 2 March. In 4Q20, we raised the ratings of Maybank, Public Bank, Hong Leong Bank and RHB to BUY, while Alliance Bank to HOLD. AMMB remains a SELL. Our sector top pick is Maybank
• In our view the worst quarter in the past 10-year earnings cycle is over, and we expect the banking sector’s earnings to recover by 18% yoy in 2021 on the back of lower impairment allowances
• Our 2021 assumptions: i) system loan growth of 3.5% yoy (2020: 3.5%); ii) NIM at 2.09% (2020: 2.05%); iii) net credit cost of 62.5bps (2020: 84bps); and iv) CIR at 47% (2020: 45.7%). Downside risks – a prolonged unemployment trend and further deterioration in asset quality

Reiterate OVERWEIGHT, More BUY Ratings in Our Banking Universe

To recap, we have raised our banking sector to OVERWEIGHT on the banking sector (in our Strategy report, 2 March 2021) during the recent 4Q20 quarter. A pullback in share prices presented the opportunity to lift the ratings of Maybank, Public Bank, Hong Leong Bank and RHB to BUY from HOLD. At this juncture, we continue to stay cautious on AMMB (SELL) due to earnings weakness in FY21-22E and risk of poor ESG-scoring following its past involvement with 1MDB. Ample market liquidity (due to low interest rates) coupled with more certainty of COVID-19 vaccines hope (on a global basis), continue to fuel recovery-themed plays (such as the banking and commodity sectors). Meanwhile, this has also given us more confidence of a potential recovery in economic and business activities, which could result in lower risks of defaults by the vulnerable group of borrowers.

Banking sector’s worst quarter is over, implied by recovery in P/BV multiple

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 the uptrend (currently at a 1.06x 2021E P/BV) is likely sustainable. We cite potential catalysts such as an interest rate hike to further re-rate the banking sector.

4Q20 Financial Results: Core Net Earnings Down 17.4% Qoq

The key domestic banks reported a total core net profit of RM4.36bn in 4Q20, down 17.4% qoq and down 36.4% yoy. We had expected a weaker quarter as most banks have previously guided on raising their pre-emptive provision buffers while simultaneously facing a higher level of direct impairments. We saw NIM continuing its recovery, +8bps on a qoq basis to 2.11%, due to the effects of lower funding costs. Based on 2020’s ROE measure, CIMB is the worst-performing bank at 2.1% while Public Bank was the best-performing with ROE at 10.8%

Source: Affin Hwang Research - 17 Mar 2021