The recently announced extension of the targeted repayment assistance programme to the B40 segment and micro-enterprises, while commendable, is unlikely to impact banks’ earnings meaningfully, by our calculations. More importantly, HP and fixed rate Islamic financing borrowers that take up the programme would need to sign new agreements and this could put to a rest issues on potential further modification losses that banks may have to bear from loan moratoriums. Also positive is that we are increasingly seeing consistency in terms of policies and measures that are being adopted during this period, which will offer investors better visibility as to the path the authorities and regulators are expected to take to navigate this landscape. For now, with the outlook on asset quality still uncertain, we keep our preference for banks with solid asset quality (HLBK, PBK). We also like RHB for its solid capital position. NEUTRAL sector call maintained.

Budget 2021 – Extension of targeted assistance to B40 and micro enterprise borrowers. As per the Budget 2021 speech, banks will extend the targeted repayment assistance (TRA) programme to the B40 segment and micro-enterprises with loans up to RM150k. Broadly similar to the existing TRA programme, borrowers in this category will be given the option of either: (i) a three-month loan moratorium or (ii) a reduction in monthly loan repayment by 50% for a period of six months. For the M40 segment, the application process for repayment assistance will be simplified, where these borrowers will only need to make a self-declaration of the reduction in income to secure repayment assistance. The above will commence in Dec 2020.

Following the Budget 2021 speech, BNM announced that it will provide additional financing facilities, enhancements to the TRA programme and several other initiatives. Among the additional financing facilities include a Targeted Relief and Recovery Facility (TRRF). This is a RM2b facility for SMEs recently impacted by the recent MCO, as well as SMEs in targeted vulnerable sectors such as personal services and F&B, among others. The TRRF will carry a concessionary rate of up to 3.5% and available through participating financial institutions.

Enhancements to TRA. With respect to the enhancements to the TRA, BNM said that these are in addition to the earlier announced measures for those who have lost their jobs and individuals and SMEs that have experienced a reduction in income following the pandemic. Among these enhancements include the above extension of the TRA to the B40 and micro-enterprises. The assistance will be extended for facilities approved before 1 October 2020 and are not >90 days in arrears. Apart from the above, of note is that BNM also stated that for hire purchase loans and fixed-rate Islamic financing, borrowers would need to sign new agreements.

Recall that the eight banks incurred total modification losses of RM1.8b in the 2QCY20 reporting quarter as banks were not able to charge additional interest on auto and certain Islamic personal financing during the 6-month moratorium period. If the statement above means that banks would be able to charge additional interest during the moratorium period, it could put to rest further issues on modification losses. Otherwise, we estimate the impact from potential further modification losses from the extension of the 3-month moratorium to the B40 segment would be 1-2%, at worst, on FY21E sector net profit, i.e. not too significant.

Apart from the above potential development with respect to further modification losses, we are positive with respect to the announcements in Budget 2021 and BNM’s statement. The key aspect we were keeping an eye out was for the consistency of policies and measures adopted, which is what we saw with respect to the financial assistance programme that was rolled out to the B40 and micro-enterprises. With that, this offers investors better visibility and predictability as to the measures that could be rolled out ahead in the event, for example, another wave of the pandemic surfaces.

Maintain Neutral. As mentioned previously, the loan moratorium and various measures have helped mask the true impact of the economic downturn on asset quality but buy affected borrowers more time to restore their financial conditions as economic conditions hopefully improve next year. We view the latest developments with positive bias for the sector and believe it reaffirms our investment thesis to stick with quality names until the path to recovery is clearer.

Our preferred picks are HLBK (OP; TP: RM17.00) and PBK (OP; TP: RM18.00) – banks with solid asset quality. Their asset quality track records suggest that the pre-emptive loan provisions required should be lower relative to peers while their smaller exposure to the corporate space would shield them from chunky loan impairments. Thus, we see these banks offering investors better earnings predictability and “safer” dividend yields (assuming banks continue to be conservative with dividend pay-outs). We also like RHB (OP; TP: RM5.75) for its capital strength. While this may not translate to higher dividend pay-outs vs peers in the near term, RHB should be able to resume with its capital management plans relatively quick once the pandemic is past (vs peers that may need time to rebuild their capital positions). AMMB (OP; TP: RM3.60) is our pick as a catch-up play.

Source: Kenanga Research - 9 Nov 2020