BNM’s engagement session yesterday provided analysts some high level overview and updates, with the following key messages; (i) expectation of a better 2H, (ii) while there are some vulnerable sectors, asset quality appears to be holding up for now. The delayed impact from the economic downturn means GIL should peak in 2021; (iii) a targeted approach to assist vulnerable borrowers was the preferred method of assistance post loan moratorium; and (iv) dividend payments will be assessed on a case by case basis. Overall, no change to our investment thesis for the sector and NEUTRAL sector call. Our top pick is RHB, while we also like HLBK and AMMB.

BNM held an engagement session with banking analysts yesterday. Below are the salient points from the meeting.

Day One Modification losses – BNM said this one-off adjustment due to accounting requirements should not impact the long-term profitability of banks. Apart from the concessionary rate funding, BNM highlighted that the reduction in SRR (currently at 2%) will also help mitigate the impact.

Asset quality – For the household segment, BNM said that the current unemployment trajectory does not appear to be as bad as what it had initially feared and to allow some time for the support measures to be felt. BNM expects economic conditions to improve in 2H, which should help with the recovery in unemployment levels. Also, around 70% of household debt is based on floating rate and the OPR cuts will help ease debt servicing burden. Similarly, the business segment should benefit from a stronger 2H environment. For now, factors that may derail the recovery include another lockdown and weaker-than-expected external demand. Notwithstanding the above, there are sectors that BNM is watching closely, which includes tourism (wholesale, retail and trade, hotels and restaurants, airlines), construction, real estate, manufacturing, and oil & gas (collectively c. 30% of system loans). While there has been some deterioration in the financials of certain firms, BNM did not appear overly concerned at this point – citing factors such as interest coverage ratios and debt servicing capacity that have remained relatively intact. Gross impaired loans (GILs) ratios are still stable for now and only expected to peak in 2021. Based on BNM’s stress test, the banking system is able to withstand a 4x rise in impaired loans before capital ratios breach the regulatory minimum.

Extension of loan moratorium – targeted approach preferred. The initial take-up rate for the loan moratorium was at 90% for individuals and SMEs, although that figure has since been reduced to around 85% as some borrowers were able to continue servicing debt repayments. Looking ahead beyond the end of the blanket loan moratorium, BNM prefers a more targeted approach that reaches out to the vulnerable borrowers, a process that the banks have already begun. This should help ease concerns of further significant modification losses that banks may have to incur should there be another blanket loan moratorium. As for the corporate segment, loan restructuring activities are ongoing. BNM highlighted that since Sep 2019, restructured loan facilities (for all segments, i.e. individual, SME and corporate) are not automatically classified as impaired but rather, determined on a case by case basis.

Dividends to be assessed on case by case basis, according to the central bank. BNM will take into account various factors such as stress testing, capital plans, economic conditions, capital buffers available as well as individual banks’ profitability in determining the level of dividends each bank will be allowed to declare. In our view, banks with solid capital positions (RHB (OP; TP: RM6.00)), strong asset quality track record (PBK (MP; TP: RM18.00), HLBK (OP; TP: RM17.00)) and dividend reinvestment programmes (MAY (MP; TP: RM7.85)) are likely to be in a better position to minimise cuts in dividend payouts or, in some instances, even maintain payout levels.

SME Relief Fund (SRF) – The total funds available under the programme amounts to RM10b. BNM said this is sourced from its internal funds and has been fully channelled to the banks. As of to date, the banks have, in turn, disbursed >50% of the funds to SMEs.

Others. There were no updates on the progress of the digital banking license at this stage. As for banking consolidation, the stand remains unchanged, i.e. market driven.

Maintain NEUTRAL sector call. In our view, factors such as an OPR cycle that is now closer to the bottom and Day One Modification losses that may not be as bad as initially feared are positives for the sector. In addition, currently trading at FY21E PE of 11.5x and PBV of 0.9x, we think sector valuations are decent. However, what keeps us from turning more constructive on the sector is the lack of visibility on asset quality. The loan moratorium and various SME lending programmes mask the true impact of the economic downturn on asset quality and hence, while banks have also continued to book in pre-emptive loan provisioning, it is nevertheless difficult to gauge the adequacy of these provisions at this juncture.

RHB is our top sector pick on attractive valuations and solid capital ratios to absorb higher loan allowances while maintaining a decent dividend payout. In addition, it is less impacted by Day One modification losses. We also like HLBK as a defensive, “high quality” bank with a strong digital infrastructure that is poised to benefit from a post Covid-19 environment. AMMB’s (OP; TP: RM3.60) valuations are undemanding and we think the stock could be an attractive catch-up play. Near-term key upside risk to our sector call is a liquidityfuelled rally and/or rotation into value/cyclicals. Key near-term downside risk is another economic lockdown if a Covid-19 second wave emerges

Source: Kenanga Research - 24 Jul 2020