We maintain our NEUTRAL call on the sector. The progress of our national vaccination rate seems encouraging and the ensuing prospect for a full economy reopening appears promising. This affirms our 3-4% system loans growth expectations for the year. Additionally, the three months interest waiver on B50 moratorium applicants is not likely to leave a huge dent on the banks as its overall mix could be less than 30% of the total assistance. That said, we reckon sentiment for the banking sector could be largely withheld by industry-wide reforms in 2022, with Bank Negara due to award up to five digital banking licenses in 1QCY22 and the implementation of a Standardise Base Rate(SBR)in Aug 2022. These pose threats to the long-term sustainability of NIMs which are already under pressure by competition for deposits, but these should not undermine the resiliency of the banking sector right away. As for Top Picks, we continue to like MAYBANK (OP; TP: RM10.65) for its defensiveness and dividend yields to provide shelter amidst possible uncertainties. Additionally, MAYBANK would be largely unaffected by the move towards the SBR as opposed to its peers. Secondly, we also like RHBBANK (OP; TP: RM6.15) for a tactical play as it is the only listed traditional bank bidding for a digital banking license with its partners in Axiata Digital (Boost). Its dividend yields are also commendable with the reimplementation of its dividend reinvestment plan.
Positive 2QCY21 earnings performance. During the 2QCY21 reporting season, we saw seven banks coming in within expectations while AMBANK, CIMB and MBSB delivered better-than-expected results. The outperformance mainly stemmed from our conservative assumptions amidst ongoing economic uncertainties from Covid-19 restrictions. Generally speaking, NII growth was spurred thanks to more optimised pricing of deposits, bringing down the cost of funds and thereby supporting NIMs. On the flipside, NOII saw softer performance in 1HCY21 as trading sentiment normalised from its peak in 2HCY20. While most banks had previously booked pre-emptive provisions in prior quarters, the shortfall in national GDP and reduced growth targets led the banks to provide more overlays in the event of further worsening conditions.
Keeping an eye on 3QCY21. The subsequent quarterly earnings would contain a range of mix signals, being the quarter where the new opt-in moratorium is rolled out. In the meantime, given the relaxations of movement controls arising from our improving vaccination rates, the spur of economic activity is likely to boost financing needs (mainly business accounts) particularly in the month of Sep 2021. With the said improvement, there could be some sooner-than-expected writebacks on impairments although it is possible that the banks could wait until there is greater certainty that the endemic phase can be achieved. This is reflective on the updated corporate guidances by most banks where credit cost expectations were increased (refer to Table 5 for updated corporate guidance post-2QCY21). Other notable changes are broad downward adjustments to loans growth, indicating that the progress of our economic recovery could still be far from desirable.
Waiver of interest for B50 likely to be immaterial. Regarding the moratorium, the Ministry of Finance sought to extend PEMULIH’s aid by providing an interest exemption to B50 applicants for the months of Oct-Dec 2021. The move is seen to dampen earnings for the banks, in addition to the recurrence of modification losses. That said, we do not believe its impact will be material despite the estimated value of total TRAs standing at RM400b (from RM160b in 2020). This is premised by the T20’s already making up upwards of 50% of new TRA applicants, as described by the banks. On the flipside, the B40 mix only constitutes c.20% of overall applicants with possible little additions from the lower end of new M40 accounts. Further, the exemption is only applicable for three months, as opposed to last year’s 6-month period.
Maintain NEUTRAL on the Banking Sector. The anticipated economic recovery looks to translate into a return in demand for loans and potential writebacks on impairment provisions could provide an uplift in earnings. However, sentiment is likely to be hindered by several near-term developments, albeit not to entirely erode the resiliency of the sector. The ones more stark to us are the introduction of digital banks in 1QCY22 and the implementation of a Standardised Base Rate (SBR) in Aug 2022, both which look to shuffle the dynamics of the banking industry (refer to overleaf for further discussion). For that, we continue to encourage positioning for safety with strong dividend yielders. Our top pick for 4QCY21 is MAYBANK (OP; TP: RM10.65) being the leader in dividend returns (6-8%) and a strong beneficiary of economic recovery as the market share leader in both loans and deposits. We also highlight RHBBANK (OP; TP: RM6.15) as their dividend proposition also stands at highly attractive rates (5-6%) post-implementation of its dividend reinvestment plan. It also serves as a tactical play for being the only listed traditional bank participating in the bid for a digital banking license (through its partnership with Axiata Digital / Boost). Meanwhile, we update our TP for BIMB (OP) to RM3.70 (from RM5.10) having completed its corporate restructuring exercise.
Loans growth expectations maintained. As of Aug 2021, system loans growth came in at2.5%YoYgrowth.This is well within our industrywide expectations of 3-4% for 2021, which will be predominantly led by household loans as business loans could take longer to pick up. We had experienced some setbacks in the mid-year period with the implementation of the MCO 3.0 which impeded economic movement. Recall that we first broke past the 10,000 new cases/day mark in July. That said, the successful rise in vaccination rates has led to steady relaxation of movement controls (albeit interstate movement is still being debated) which could possibly fuel the demand for loans as consumers gain a better bearing of their cash flows while a more business-friendly environment could sprout more SMEs. This is further supported by government initiatives such as PEMULIH providing some assistance to cushion any blows. Downside risk will mainly stem from another Covid variant which could nullify vaccination efforts, which at least are not present at the moment.
NIM prosperity to ease up. The fall in OPR to 1.75% since July 2020 led to banks finding room to reprice their offerings, which translated to an overall improvement in NIMs thanks to the overweighing adjustments to deposit rates. Post 2QCY21 results, the banks indicated that the competition for more deposits could intensify, which we believe is in reaction to possible resurgence in loans and to maintain an adequate loan-to-deposit ratio (LDR). Recall that as of Aug 2021, industry CASA-to-deposit ratio stood at 30.4%(from pre-pandemic Feb 2020 of 25.4%)to which we believe could finally see a reversion as customers convert to better interest yielding products or withdraw for consumption.
Upcoming Standardised Base Rate (SBR) might press NIMs further. In Aug 2021, Bank Negara announced that the Reference Rate Framework will transition into the SBR model where the base rate of all banks shall be in accordance to the OPR. This will be enforced in Aug 2022 and only be applicable to new floating-rate loans (housing and personal loans) and generally do not affect hire purchases and corporate /SME loans. Existing floating-rate loans for retail borrowers will not be affected by this move. All in, the intent by Bank Negara is for consumers to more easily compare lending rates between banks, albeit certain factors such as attached credit risks are variables to the final effective rate.
This is not expected to shake up the banking sector immediately, since it only applies to new accounts from Aug 2022 onwards. However, we expect to see some repricing pressures from the banks which are further away from the OPR, given the more obvious price gap to consumers and the genericity of loans offerings. The net impact to NIMs from repricing could be more apparent to the banks with existing reference rates far from the OPR. Granted, the banks still have several quarters to proposition adjustments and reposition its products when the time comes, muting any noticeable impact to its profitability in 2HCY22. We present the tables below as a reference to the standing of each bank as well as their NIMs in accordance to their base rates in 2QCY21.
Digital banks could bring new things to the market. In Dec 2020, Bank Negara released its first “Licensing Framework for Digital Banks”to dictate its key requirements for participation in this new space. As of the closure of application in Jun 2021, there were a total of 29 participants bidding for one of the five Digital Banking licenses to be awarded by 1QCY22. In the near-term, Digital Banks are likely to align their business focus with Bank Negara’s intent of catering to the un(der)served and un(der)banked markets. However, due to its structural difference of being almost entirely digital and without a physical branch, as opposed to traditional banks, Digital Banks could offer a new experience to customers.
- Utilising data analytics to provide personalised micro-sized products for every unique customer.
- Heavy technologically dependent infrastructure could facilitate large order quantities at a fixed cost.
- Low human involvement (i.e. administrative functions, compliance, document processing) to keep operating cost lean.
Our concerns are mainly drawn on how competitive Digital Banks could be in terms of offering deposit rates as they could also offer an interactive experience of offering better rates in line with a customer’s savings goal. On the loan front, we believe there could be little entanglements as Digital Banks are expected to focus in catering to its own target markets, at least for the first three years. In the much longer term, it is possible that successful and profitable Digital Banks could threaten the position of traditional banks and possibly lead to an industry consolidation as greater operating efficiency gets singled out.
Source: Kenanga Research - 4 Oct 2021
Chart | Stock Name | Last | Change | Volume |
---|
2024-03-28
MAYBANK2024-03-27
MAYBANK2024-03-27
MAYBANK2024-03-27
MAYBANK2024-03-27
MAYBANK2024-03-27
MAYBANK2024-03-27
RHBBANK2024-03-26
MAYBANK2024-03-26
MAYBANK2024-03-26
RHBBANK2024-03-25
MAYBANK2024-03-25
MAYBANK2024-03-25
RHBBANK2024-03-25
RHBBANK2024-03-22
MAYBANK2024-03-22
MAYBANK2024-03-22
MAYBANKCreated by kiasutrader | Mar 25, 2024