• BNM affirmed in its 2H20 Financial Stability Review (FSR) that the banking sector remains resilient even under a more adverse stress test scenario. Capitalization in the banking system remains strong (Feb21 CET 1: 14.7%)
• We agree with BNM that downward pressure on banks’ earnings is likely to persist, but the impact will be less severe than in 2020 as provisions have been front-loaded in 4Q20. Downside risks would be mitigated by economic improvement, while financial relief and assistance for borrowers will support debt-servicing capability and banks’ earnings
• Reaffirm OVERWEIGHT. Ample market liquidity coupled with more certainty of COVID-19 vaccines, continue to fuel recovery-themed plays such as the banking sector. Our top pick is Maybank (BUY, TP: RM9.40), supported by its 7-8% dividend yields. Downside risks – a prolonged unemployment trend and further deterioration in asset quality

Banks Remained Well-positioned to Support Economic Recovery

In its 2H20 Financial Stability Review (FSR), BNM reiterated that the domestic banks continued to be underpinned by strong financial buffers and remained in a healthy liquidity position, supported by stable funding conditions. Although credit risks are expected to rise (due to borrowers who are affected by the Covid-19 pandemic), we take comfort in the amount of buffers that have already been set aside. Banks under our universe had in aggregate set aside about RM6bn in pre-emptive provisions (or equivalent to 34bps of the 84bps net credit cost in 2020).

Credit conditions expected to tighten for corporate loans, but ease for SMEs

According to a survey done by BNM, banks are more than able to support credit demand consistent with GDP growth. Nonetheless, heightened credit risks and rising impairments could deter banks from relaxing their lending criteria to corporate borrowers. Banks may potentially ease credit conditions for SMEs as these loans are typically smaller in size and collateralized, and SMEs continue to benefit from the government‘s support measures.

Maintain OVERWEIGHT. Our Sector Top Pick Is Maybank

We reaffirm our OVERWEIGHT stance on the sector, expecting an earnings recovery of 18.3% yoy in 2021, driven by lower provisions. Pullbacks in the share prices of Maybank, Public Bank, Hong Leong Bank and RHB present buying opportunities. Ample market liquidity (due to low interest rates) coupled with more certainty of COVID- 19 vaccines (on a global basis) continue to fuel recovery-themed plays such as banks. Over the longer term, the start of an interest rate hike cycle would be a key catalyst for the sector (resulting in improved NIM) and should bode well for banking stocks. Our top pick is Maybank.

Source: Affin Hwang Research - 31 March 2021