The recent 2QCY20 reporting quarter saw sector CNP slip 42% YoY (-32% QoQ) due to a combination of revenue headwinds (modification losses and NIM pressure) and preemptive loan provisioning. That said, the trend appears anticipated given that majority of the banks’ results met consensus expectations. At this stage, visibility on asset quality is still hazy, but the ongoing booking of pre-emptive provisioning bodes well for 2021 earnings. We keep our NEUTRAL sector call. Our preference is for banks with solid capital (RHB, our top pick) and strong asset quality (PBK, HLBK) as sector headwinds transition from revenue-related to asset quality. We also like AMMB as a laggard stock.

The recent 2QCY20 reporting quarter saw most banks meeting expectations, despite further deterioration in net profit. Five banking groups reported results that met estimates, i.e. AMMB, HLBK, Maybank, PBK and RHB. Affin’s results were ahead of our and consensus expectations as another quarter of healthy trading gains helped cushion bottom-line from NIM and modification loss pressures while ABMB’s results beat our forecast (but in line with consensus) on better-than-expected NoII. CIMB disappointed again (below both our and consensus forecasts) as the sequential pickup in NoII was not as robust as some peers, coupled with an upward revision to credit cost guidance.

Sector 2QCY20 PATAMI slumped 44% YoY (-32% QoQ) with majority of the banks posting weaker QoQ and YoY results due to a combination of NIM squeeze, modification losses and higher loan allowances. In mitigation, marketrelated income such as trading and investment gains as well as brokerage fees were healthy while opex was well controlled.

On the other hand, dividends were the main disappointment this quarter, where out of the eight main banking groups, only HLBK declared a final DPS of 20 sen (4QFY19: 34 sen) in conjunction with the release of its 4Q results. This was below our expected 34 sen, as the pay-out ratio fell to 30% from 39% in FY19. For the other nonFYE June banks, interim dividends were deferred to preserve capital and liquidity, as well as pending a clearer picture on the outlook for asset quality.

Key takeaways from the briefings are as below:

1. Update on post auto loan moratorium support for borrowers. While still early days, most banks estimate that c. 10-15% of group loans may require some assistance post 30 Sep, with CIMB having guided the highest proportion of 20-30% of group loans, albeit tentatively. The impact on asset quality and provisions, however, is still uncertain as it is unclear when these loans will need to be staged and given that not all these loans will turn impaired. That said, we think once the proportion of loans is clearer, banks can then book in the necessary preemptive provisions and, hopefully, move forward on a cleaner slate to 2021;
2. NIM squeeze guidance widened, at c.15-20bps (vs 15bps previously) to take into account 2QCY20’s modification losses and July’s OPR cut, but excludes further modification losses from the above R&R loans (impact not expected to be as significant) and OPR cuts. This time around, majority of the banks are expecting a further 25bps OPR cut, in line with our economist. Our forecasts take into account another 25bps OPR cut but not further modification losses;
3. Credit cost guidance to remain elevated in 2021, but not as bad as this year. We note that some banks raised their credit cost guidance during the reporting quarter due to worse-than-expected 2Q GDP and higher management overlays. For banks that provided some expectations with respect to credit cost in 2021, the guidance for charge offs to remain elevated is unchanged, but the banks seem optimistic that 2021 credit cost levels would be lower vs 2020;
4. Dividends – how deep is the cut? While the banks remain committed to paying dividends, we note AMMB’s and HLBK’s recent FY03/20 and FY06/20 dividend pay-outs were cut to 30% each from 39-40% in FY19. For now, our dividend pay-out assumptions are generally at 40% or lower.

Maintain NEUTRAL sector call. The main earnings downgrade during the quarter was for CIMB (FY20E: -31%; FY21E: -0%), which led to a 3% reduction in CY20E sector net profit but CY21E sector net profit was tweaked up by 2%. We now forecast sector CY20E EPS to contract by 29% YoY (CY20E ROE: 7%) while we foresee CY21E sector EPS to rebound by 16% YoY (CY21E ROE: 7.7%) following NIM expansion of 9bps and sector credit cost easing to 58bps (CY20E: 71bps). RHB remains our top pick while we also like PBK, HLBK and AMMB. Nearterm upside risk to our sector call is a liquidity fuelled rally, rotational plays into value/cyclicals as well as betterthan-expected macro data. Near-term downside risk is another lockdown if a second wave of rising Covid-19 infection emerges

Source: Kenanga Research - 9 Sept 2020