The banks have seen their share prices rallying in recent weeks given positive news on the Covid-19 vaccines. Fundamentally, we have yet to see improvement with asset quality and elevated impairments are still major concerns. The on-going CMCO raises further questions on the extent of further top-up in the banks’ provisioning ahead. We maintain our view that asset quality will likely be the key swing factor to earnings ahead but for our Top Pick we prefer RHB (OP; TP: RM6.30) due to its capital strength. Maintain Neutral on the sector.

Liquidity fuelled rally. In the 4QCY20, the banking sector saw returns of +24% which outperformed the FBMKLCI (+9%). Positive developments on the vaccine front coupled with waning interests in the gloves sector saw the banks outperforming the FBMKLCI in the 4QCY20, notably led by smaller cap banks which we believe was due to catch-up play amidst undemanding valuations. In 2020, MAYBANK and CIMB underperformed both the sector and FBMKLCI due to concerns over: (i) chunky impairments, and (ii) heavy exposures to corporates and regional markets. We also observed that banks that rallied significantly were those with (i) historically strong asset quality, (ii) lower exposures to corporate, and (iii) significant exposure to the retail market - as the retail segment is perceived to be recovering expeditiously given the positive vaccine developments.

Adequate provisioning still a question. The key focus in the near term is asset quality, especially during this Targeted Repayment Assistance (TRA) period. Going into end of Nov 2020, take-up rates for the TRA were quite muted but the banks do not discount uptick ahead depending on the impact of the current CMCO. Post 3QCY20 results, the banks have reported assistance within their guidance (10-15%). Maybank reported the highest exposure in Targeted Repayment Assistance Programmes (Targeted Assistance & R&R) which we estimated at 14% of total group loans with <10% domestic. CIMB saw its Targeted Assistance & R&R) at c.6% of its group loan book with domestic at <10%. B40 exposure by the banks are relatively minimal with most reporting the low teens of their loans book; AMMB, CIMB and PBK reported c.10% or under while those in low teens are Maybank (13%), PBK (12%) while RHB reported 14% under its retail loan book. We noted further that some banks raised their credit cost guidance during the last reporting quarter. Same reason as before which is essentially due to management overlays but for CIMB and AMMB it was primarily due to macro-economic overlays and early signs of repayment slippage (AMMB). We, however, do not discount further overlays ahead due to concerns of repayment given the prolonged CMCO.

Not all doom and gloom. Loans saw a slight uptick QoQ (+0.9%) in the last reporting quarter as the economy reopens under the RMCO. Most banks still maintain their guidance for CY20 but remain uncertain for CY21. Despite the positive vaccine developments, most banks are still cautious on their outlook/targets ahead maintaining concerns of further MCOs as the efficacious and logistics of the vaccines are still in question. BNM had kept the OPR unchanged at 1.75% in its recent MPC meeting suggesting it is done with its OPR cuts, which would be positive for banks, easing NIM pressures. Hence, NIM is expected to improve ahead given the absence of further OPR cuts, supported by re-pricing of deposits and unwinding of modification losses. We also noted not many revisions in consensus earnings forecast and hence likely to have bottomed out. Some slight earnings upgrade for FY21 can be seen notably for HLBANK, PBANK and MAYBANK albeit minor with CIMB and RHB relatively flat. Despite minor changes, we note that the banks’ share prices have rallied in recent weeks which we believe was due to liquidity-fuelled rally, and rotational plays into cyclical stocks on positive vaccine news.

Forecasts. Minor revisions to our FY21 estimates (c.2%); thus, we foresee sector net profit to rebound by c.18% YoY following NIM expansion of c.9bps while credit cost is expected to ease to c.58bps. Sector ROE is expected to improve to c.8%, but still short of the double-digit levels that the sector had consistently posted over the years.

Maintain NEUTRAL sector call. We continue with our view that asset quality will likely be the key swing factor to earnings ahead. But we believe capital strength will be an added factor in recovery post pandemic. We however prefer RHB (OP; TP: RM6.30) for our top pick for its capital strength and it should be able to resume with its capital management plans relatively quick once the pandemic is past. BIMB (OP; TP: RM4.95) is our pick as a catch-up play offering a cheaper entry into Takaful Malaysia. Near-term 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 further lockdown from further wave of rising Covid-19 infection.

Source: Kenanga Research - 6 Jan 2021