BNM released its Financial Stability Review report for 2HCY21. The recent years have left many learning opportunities in navigating around the socioeconomic implications of Covid-19 which BNM is expecting to ease for the better. Still, uncertainties are spawning from the Russia-Ukraine war albeit may not be materially impactful to our local economies thanks to the country not being meaningful trade partners. For the moment, BNM is steadfast in keeping a neutral stance on OPR in favour of minimising disruptions in recovery and pricing stability. Exercising further prudency, its tone is that that credit cost provisions may require more time before unwinding to have better clarity on the sustainability of repayment habits. BNM also ran more intense stress testing over a three-year period (usually two years) which still conclude that the framework of our financial institutions are still well intact against hefty downward shifts. While we concur with the cautious tone taken by BNM, we believe there is still value to be had by investing in the sector, as exposure to the broader economy could cushion investors against sector specific threats. Additionally, selective investing could reward yield seekers with generous dividends and medium-term security (i.e. riding on overlays and excess provisions still pocketed in the banks’ books). We maintain our OVERWEIGHT call on the Banking sector for now, pending further commentary from our upcoming 2QCY22 strategy report.

Well-rooted in a time of growth. Covid-19’s impact continued to linger but is softening in light of the increasing vaccination rates enabled for a smooth reopening of the economy and loosening of movement controls. Industries that suffered heavily (namely hospitality and retails) were rejuvenated by stronger economic support while households continue to focus on the attention to secondary markets for homes. Overall, the banks kept their capital and liquidity buffers intact as we closed Dec 2021 with an industry Tier 1 capital ratios closing in at 15.7% (Jun 2021: 15.4%) and liquidity coverage ratio at 154% (Jun 2021: 149%). In the briefing, BNM is targeting a GDP growth of 5.3%-6.3%, which is close to our in-house projections of 5.0%-5.5%, riding on the ongoing technology upcycle, reopening of internatoional borders and better employment and income prospects in the country.

Monetary policies to prioritise balance. In the current climate, BNM appears to be content with the 1.75% OPR as any tightening right now could disrupt price stability and economic recovery. Though we look to enjoy many tailwinds to fuel recovery, uncertainties still persist from the ongoing Russsa-Ukraine war while global reopening is not exactly in full force yet. On the flipside, locally, we are stirred by supply-driven inflation which could require further mending of supply chains to stabilise. We anticipate two 25 bps rate hikes to only take place in 2HCY22 when our local landscape is more ready to absorb a higher interest rate environment, which is also in line with BNM’s tone of inducing policy changes gradually.

Credit risk sought to consequently ease. Past repayment assistance programs had proved effective in containing credit risks with the PEMULIH and URUS programs in 2HCY22 brought in as a supplementary measure amidst MCO 3.0. Dec 2021 reported loan impairments at 1.0% (vs Jan 2021: ~1.2%) and delinquencies at 0.4% (vs Jan 2021: ~0.8%). Provisions proceeded to heighten but rehabilitation rates indicated that troubled accounts would persist to contribute meaningfully to the financial ecosystem. That said, immediate-term readings leaned towards substantial positive shifts with corporates guiding during their recent 4QCY21 result briefings that outstanding repayment assistance accounts had lowered by 60% in January 2022.That said, writeback on provisions could take some time as longer periods of time could be required for banks to establish better visibility on the repayment behaviour of their respecitve borrowers. For the moment, it appears that a majority of the writebacks we have seen are vaccination-related recoveries with broader economic factors yet to be established (refer to Appendix 1 in the overleaf).

Maintain OVERWEIGHT. In spite of BNM’s prudent stance, we are still confident that investors could flock into the banking space. We reckon the demand for loans could be exponential and its growth may mitigate any NIM erosion from the ongoing competition of deposits. Most banks anticipate at least one OPR hike in 2HCY22 and this should translate to a slight bump to annualised NIMs thereafter. We anticipate NOII to stabilise from the industry-wide decline in CY21 as we operate in a more normalised trading and investing landscape. Meanwhile, the growth in fee-based income will help to build a more sustainable base for the banks. Dividend payments are also mostly back to pre-Covid levels, indicating that soundness in capital management has recovered. With regards to the digital banking license, BNM has determined the winner of the five licenses but will be reserving an official statement in due time, pending finalisation of legal documentations. We withhold any specific stock recommendations for now, pending the release of our 2QCY22 banking strategy piece in the coming days. For the 1QCY22 stock picks, we have ABMB (OP; TP: RM3.85) and RHBBANK (OP; TP: RM6.70) as our Top Picks which have gained 26% and 11%, respectively, in price movements.

Source: Kenanga Research - 31 Mar 2022