Yesterday, BNM released its Financial Stability Review report for the Second Half 2020. Despite operating in an unprecedented socioeconomic environment, our banking system remains resilient, upheld by strong liquidity management and capital adequacy practices. Going into 2021, BNM expects GDP growth to kick in from the revitalisation of local businesses, economic reopening and boosts from export demand, Covid-19 vaccinations, and supportive government policies. Meanwhile, targeted assistance programs are expected to persist in efforts to keep troubled borrowers afloat. We concur with BNM’s optimistic tone, breaking away from the struggles of 2020. We also add that even if loans growth does not pick up alongside GDP, we are still assured that banks will operate in a better cost environment having provided for heavier allowances in 4QCY20 and due to their leaner cost structures from previous reorganisation exercises. We maintain our OVERWEIGHT call on the Banking sector with our preferred picks being: (i) MAYBANK (OP; TP: RM9.10) for its dividend yield potential and entrenched market leading position, and (ii) RHBBANK (OP; TP: RM6.40) for its industry-leading CET-1 reserves which provides strong capital safety in case further tightening is needed.

Sturdy enough to brace the impact. We came away from BNM’s analysts briefing for its Financial Stability Review for 2HCY20 feeling reassured that our view of stronger recovery ahead are well founded and could bolster the banking sector in the coming quarters. To sum up the events of 2HCY20, various forms of movement control orders were implemented to navigate the society to curb the spread of Covid-19 while also finding a balance in economic activity. Monetary reliefs were introduced for those economically challenged in addition to the lapse of the Sep 2020 loan moratorium being bridged with assistance programs in the form of payment reduction or deferment. The combined effort is argued to have protected the financial market from further unprecedented volatilities preventing widespread defaults from households and SMEs.

2HCY20 household debt-to-GDP at an all-time high of 93.3%. This was skewed by plunging GDP, no thanks to movement controls implemented since March 2020. Despite this, household debt continued to register some growth, albeit at a much slower pace, as households take advantage of the low interest rate environment for large discretionary purposes (i.e. residential property, motor vehicles) with the loan moratorium also keeping loan bases high by delaying potential defaults. 1HCY20 household debt-to-debt ratio was also toppish at 87.5% for the same reason.

(Refer to our concurrently released report “Banking: February 2021 Statistics” for further information regarding the monthly loan statistics)

Growth-enabled. For 2021, BNM expressed that a 6.0-7.5% GDP growth is not unreasonable, supported by progressive reopening of local business activities and loosening of movement controls, resurgence of export demand (particularly from the global technology upcycle), vaccination efforts and continued assistance from government initiatives to stimulate spending. Operationally speaking, we believe that banks should register better earnings growth even if GDP growth does not translate to better loans growth. This is premised on operating cost of banks remaining relatively lighter having invested in digitalisation and right-sizing in the prior year. Additionally, impairments are also anticipated to be less burdensome from frontloading of provisions in 4QCY20 and lower credit risk across most economic sectors.

Risks still exists, but more moderately. Heavy credit risk was a major concern from the previous chokehold on economic activity. As of Dec 2020, the banking system registered an annualised credit cost of 78 bps from a mere 8 bps in Dec 2019. Key sectors, such as construction and manufacturing are expected to pick up with national infrastructure projects and higher production, elevating cash flow and debt payment concerns. While certain sectors are expected to remain somewhat affected (i.e. aviation, tourism, retail), we opine that credit risks for 2021 is well contained with debt-servicing capacity for the overall business sector already improved to 4.1x in 2HCY20 as opposed to 3.9x in 1HCY20. On the flipside, the total loan loss coverage as of Feb 2021 registered at 107.4% (from 80.0% in Feb 2020).

Stressed and tested. To build confidence in the financial system, BNM conducted a stress test to gauge the effects of a weaker-than-expected GDP. From this test, it was derived that capital ratios for the banks would arrive at close to 16.8-17.0% in both scenarios (from 18.5% in Dec 2020), which is deemed adequate in the face of another prolonged economic slowdown.

Maintain OVERWEIGHT on the banking sector. While near-term prospects appear dim, we believe sentiment would encounter a kneejerk effect when decent economic recovery is posted. The rolling out of vaccination efforts would ultimately translate to less restrictive movement controls until we are able to make do without them all together. Additionally, we do not expect further OPR cuts for the year but welcome any hikes as it would enable better pricing opportunities for banks and also boost sentiment. Additionally, we do not anticipate further provisioning to be worrisome given that most banks have frontloaded their books during 4QCY20. In terms of stock picks, we like MAYBANK (OP; TP: RM9.10) for its industry-leading yield (7-8%) and high dividend-toROE spread amongst its peers. On the note of economic recovery, being the market share leader in domestic loans, MAYBANK could be poised to experience accelerated loans growth given its brand equity and outreach. Meanwhile, we also like RHBBANK (OP; TP: RM6.40) for its leading CET-1 ratio of 16.2%. This should enable enables greater allowance to implement capital management strategies. Additionally, RHBBANK offers the next best dividend returns of 4-5% amongst the rest of its conventional peers (2-4%).

Source: Kenanga Research - 1 Apr 2021