The Prime Minister announced yesterday that banks will continue to provide loan repayment flexibility to individuals and SMEs that have been affected by the pandemic. Generally, the targeted approach is consistent with BNM’s recent signal to analysts and we do not expect the measures to be as punitive on the banks as the current arrangement. While we believe these measures will serve to keep asset quality in check in the near term, visibility further out remains cloudy and thus, it is difficult to gauge the adequacy of loan provisions at this juncture. We also do not discount the possibility that these loans may also require higher ECL reserves, leading to upside risk to 2020F credit cost guidance. Flipside, the banks can move ahead on a cleaner slate. 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.

The Prime Minister announced yesterday afternoon that banks will continue to assist borrowers post 30 Sep, but with a more focused and targeted approach catering to individuals and SMEs that continue to be affected by the pandemic. The salient points of the targeted moratorium extension and provision of repayment flexibility are as follows:

• Extension of loan moratorium by a further three months for individuals who have lost their jobs in 2020 and are still unemployed;
• Reduction in loan instalment for individuals who are still employed but have seen reduction in salaries. The reduction in loan instalments will be in proportion to their salary reduction for a period of at least six months.

For HP loans, affected borrowers will be offered revised instalment schedules that are in line with the HP Act. We believe this is to help mitigate the impact of Day One Modification losses that the banks experienced under the current loan moratorium programme.

For other individuals and all SME borrowers affected by Covid-19, banks will offer the following flexibility:

• Interest-only repayments over a period of time;
• Lower monthly instalments via lengthening of the loan tenor; or
• Other form of flexibility until the borrower is in a more stable position to resume repayments in full.

Borrowers will need to apply directly to their respective banks beginning 7 Aug.

Targeted approach not too surprising, given that BNM had communicated to analysts last week that this was the Central Bank’s preferred choice going forward, post moratorium period. As mentioned above, we do not expect these measures to be as punitive on the banks as compared to a blanket loan moratorium arrangement. In addition, with loan repayments set to resume, albeit sub-normalised levels, this should help provide better visibility to banks in terms of liquidity and funding needs.

Questions that still linger:

1. Proportion of moratorium loans that require further support? In our previous conversations with some of the banks, the banks were unable to provide more colour at this stage as to the proportion of moratorium loans that may require further support. Partly, this was because the process of affected borrowers (especially retail borrowers) approaching the banks have been “slow”. Yesterday’s announcement provides better clarity as to the options available to affected borrowers and this may speed up the process of these borrowers coming forward.

2. Higher ECL for these impacted loans? We do not discount the possibility that some or all of these loans may be considered as R&R cases and the banks may need to set aside higher ECL reserves if earlier pre-emptive provisioning prove inadequate. Thus, there could be upside risk to 2020F credit cost guidance, but the flipside is a “cleaner slate” for banks to move forward.

3. How high can GILs rise? We believe these measures will serve to keep asset quality in check in the near term (such R&R cases may not need to be classified as impaired), but visibility further out remains cloudy and thus, it is difficult to assess the adequacy of loan impairments that the banks are setting aside.

4. Operationalisation of the assistance.

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 11.4x and PBV of 0.8x, 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. RHB (OP; TP: RM5.75) 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 (OP; TP: RM17.00) 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 liquidity-fuelled 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 - 30 Jul 2020