The recent 3QCY20 reporting quarter saw a 42% QoQ uptick in sector CNP on a combination of healthy NII (due to absence of modification loss) and NOII with most banks broadly tracking our expectations. That said, asset quality is still opaque at this juncture with credit charge still elevated as further provisioning while necessary, fuelled more uncertainties as to the real extent of impaired loans. We keep our NEUTRAL sector call. Our preference is for banks with strong asset quality (PBK, HLBK) and solid capital (RHB). We also like BIMB as a laggard stock.

The recent 3QCY20 reporting quarter saw most banks meeting expectations, with the absence of Day 1 modification loss. Four of the banks in our banking universe i.e. Maybank (MP; TP: RM8.60), MBSB (OP, TP: 0.80), PBK (OP; TP: RM20.25) RHB (OP; TP: RM6.30) saw their results that seem to come in ahead of our/ consensus at over 80% of full-year estimates but due to revised credit costs guidance (PBK) and further loan loss provisioning expected in the 4Q, we consider them as broadly tracking expectations. Four banks i.e. AFFIN (OP; TP: RM1.60), ABMB (MP, TP: RM2.70), BIMB (OP, TP: RM4.95) and HLBK (OP; TP: RM18.50) posted results which were within our/consensus full-year estimates. AMMB’s 1HFY21 CNP formed 52% of both our/consensus estimates but we consider it to be below given the revised credit cost guidance while CIMB’s 9MFY20 make up just 57%/51% of our/consensus estimates due to impairments in its bond book.

ABMB and AMMB were expected to declare dividends (in conjunction with their interim results) but did not do so citing economic uncertainties. However, there were a couple of surprises; MAYBANK declared an interim DPS of 13.5 sen (instead of in the 2Q) attributed to improved earnings and capital levels. BIMB’s declared dividend (normally declared only in 3Q) of 12.6 sen DPS implied the same payout (at 36%) as in FY19, suggesting it is comfortable with its capital ratios and that major deterioration in asset quality is unlikely ahead. We understand from MAYBANK that its interim payment is not indicative of the full-year payout which will depend on the outlook and regulator’s approval.

Outlook still cautious. Loans saw an uptick QoQ albeit in low single-digit as the economy reopened under the RMCO. Despite the positive vaccine developments, most banks are still cautious on their outlook/targets ahead maintaining concerns on further CMCOs and the efficacious and logistics of the vaccines are still in question. So far going into end of Nov, the take-up rate for the Targeted Repayment Assistance (post 6-month moratorium) offered by the Banks are quite muted but the banks do not discount uptick ahead depending on the impact of the current CMCO. As previously guided, post moratorium assistance is expected for 10-15% of their loan book with most banks reporting such numbers so far. B40 exposure by the banks are relatively minimal with most reporting low teens exposure to their loans book; AMMB, CIMB and PBK reported c.10% or below while those in low teens are Maybank (13%) and PBK (12%) while RHB reported 14% under its retail loan book. Given the uncertain numbers, asset quality outlook still looks hazy. Credit cost guidance raised by some banks - We note that some banks raised their credit cost guidance during the reporting quarter, essentially due to management overlays and macro-economic overlays given the hazy outlook. We, however, do not discount further overlays in 4Q on concerns of repayment slippage given the prolonged CMCO. On a more positive note, this aggressive pre-emptive provisioning by the banks will give a much more optimistic credit costs level for 2021. A more positive note is that NIMs are expected to improve further due to the absence of further OPR cuts supported by repricing of deposits and unwinding of modification losses. Special Relief Facility (SRF) is another contributing factor in elevating NIMs. While there will be additional modification losses in 4Q, it will likely be minimal given it’s a targeted 3-month moratorium. Some banks reported better CASA growth (in high single-digit) given the narrowing spread between FDs and CASA as depositors prefers to hold cash.

Maintain NEUTRAL sector call. We continue with our view that asset quality will likely be the key swing factor to earnings ahead. This recent reporting quarter shows further loans loss provisioning by the banks with earnings visibility still hazy. We maintain our preference for banks with solid asset quality such as HLBK (OP; TP: RM18.50) and PBK (OP; TP: RM20.25). Their smaller exposure to the corporate space would shield them from chunky loan impairments. We also like RHB (OP; TP: RM6.30) for its capital strength. BIMB (OP; TP: RM4.95) is our pick as a catch-up play offering a cheaper entry into Takaful Malaysia. Furthermore, its asset quality is in a solid position after PBK and HLBK. Near-term upside risk to our sector call is a liquidity fuelled rally, rotational plays into value/cyclicals as well as better-than-expected macro data. Near-term downside risk is further lockdown from further wave of rising Covid-19 infection.

The recent 3QCY20 reporting quarter saw most banks meeting expectations, with the absence of Day 1 modification loss. Four of the banks in our banking universe i.e. Maybank (MP; TP: RM8.60), MBSB (OP, TP: 0.80), PBK (OP; TP: RM20.25) and RHB (OP; TP: RM6.30) saw their results seemingly coming ahead of our/consensus full-year estimates but due to revised credit costs guidance (PBK) and further loan loss provisioning expected in the 4Q, we consider them as broadly tracking expectations. Four banks i.e. AFFIN (OP; TP: RM1.60), ABMB (MP, TP: RM2.70), BIMB (OP, TP: RM4.95) and HLBK (OP; TP: RM18.500) posted results which were within our/consensus full-year estimates. AMMB’s 1HFY21 CNP formed 52% of both our/consensus estimates but we consider it to be below given the revised credit cost guidance while CIMB’s 9MFY20 make up just 57%/51% of our/consensus estimates due to impairments in its bond book.

Dividends were not expected to be declared in this quarter except by ABMB and AMMB, which however, were not declared citing economic uncertainties. However, there were a couple of surprises; MAYBANK declared an interim DPS of 13.5 sen (instead of in the 2Q) attributed to improved earnings and capital levels. BIMB’s declared dividend (normally declared only in 3Q) of 12.6 sen DPS implied the same payout (at 36%) as in FY19 suggesting it is comfortable with its capital ratios and that major deterioration in asset quality is unlikely ahead. We understand from MAYBANK that its interim payment is not indicative of the full-year payout which will depend on outlook and regulator’s approval.

Sector 3QCY20 PATAMI improved 45% QoQ (-14% YoY) with majority of the banks posting stronger QoQ results due to a combination of healthy NII and NOII.

i) Net interest income (3QCY20: -2% YoY, +6% QoQ). Excluding the modification losses of c.RM2.4b in 2QCY20, sector net interest income would have been up by 41%. Loans saw a slight uptick (+1% QoQ) as the economy reopened under the RMCO. BNM statistics points to a higher loan disbursement (+15% QoQ vs loans demand: +13% QoQ) underpinned by disbursement in Household loans (+54% QoQ) while Business disbursements fell 12% QoQ during this period. Not surprisingly, banks that focus on Retail chalks up higher loans QoQ; BIMB (+4% QoQ), AMMB (+3% QoQ), AFFIN, PBK and MBSB (+2% QoQ). Net interest margin (NIM) – ex-modification losses saw improvement by 20bps essentially due to repricing of deposits with 3QCY20 funding costs shedding 38bps by our estimates. Improvement in NIM was also supported by higher CASA ratio which moved 2ppt to 34%.

ii) Non-interest income (3QCY20: +7% QoQ, +9% YoY). NOII showed sequential improvement thanks to buoyant capital market activities. Core banking fee rebounded 22% QoQ but trading and investment gains fell 23% QoQ. Notable gains for the quarter were AFFIN (+22% QoQ), ABMB (+49% QoQ) and CIMB (+29% QoQ), largely driven by their core banking fee (ABMB and CIMB).

iii) Overheads (3QCY20: +3% QoQ, -7% YoY). In tandem with improving earnings, we find a slight increase in opex with spending mostly for administrative and marketing purposes. The easing of movement restriction allowed banks to top-up their marketing as well as other discretionary opex during the quarter. Nevertheless, we expect further uptick in the coming quarters (in tandem with improvement in earnings) as some opex were merely deferred and will need to be incurred down the road. Positive Jaw for most banks saw CIR improving by 3ppts to 44%.

iv) Loan impairment allowances (3QCY20: -3% QoQ, >100% YoY). Loan impairment allowances remained elevated during the quarter due further management and macro overlays, as well as CIMB setting aside a further RM250m in impairments relating to its bond book (O&G space). In terms of credit cost, sector credit cost was relatively flat at 90bps with HLBK, MAYBANK and RHB reported lower credit costs due to a combination of better loan recoveries and absence of further overlays. Banks that reported significant upticks from the previous quarter include AFFIN (51bps to 99bps) AMMB (118bps to 134bps) and BIMB (99bps to 119bps) due primarily for further macro and management overlays. In terms of asset quality, sector GIL actually fell by 16bps to 1.93% as the loan moratorium allowed some borrowers to regularise their accounts. Together with the higher allowances set aside, sector LLC jumped 12ppt QoQ to >100%.

Source: Kenanga Research - 14 Dec 2020