Macquarie Equities Research (MQ Research) released a report on banks yesterday (11 Jun), cutting adjusted net profit for the financial year 2020 and 2021 by -22% and -3% respectively, to account for another 0.5% cuts in the overnight policy rate in 2H20 and higher provisioning charges.

MQ Research’s order or preference for banking stock remains intact, with CIMB coming in as its top pick. Read on for more.

Conclusion

Across the board, MQ Research downgrades aggregate bank FY20/21 adjusted net profit (NP) by -22%/-3% to reflect elevated expected credit loss (ECL) provision front-loading as well as a further -50bps rate cut. This adjusted number excludes the one-off modification losses of RM3.7bn.; including this would reduce aggregate CY20 reported NP 20%, pointing to a 45% y/y decline. Following the recent improvement in banks’ trading valuations, MQ Research downgrades MAY and AMM to Underperform. Broadly, the thesis expounded in Taking it on the chin, but still standing remains intact and MQ Research maintains its order of preference: CIMB > RHB > Hong Leong > Public > Maybank > AmBank.

RM3.7 Modification Losses

As MQ Research flagged in an earlier report: negative implications the banks’ non-accrual of additional interest on the hire purchase (and Islamic fixed-rate) loans will result in a sizable one-off modification loss. Following 1QCY20 briefings, MQ Research finetune its estimated modification loss to RM3.7bn, (factoring opt-out rates). While banks indicate discussions are ongoing with regulators and the government to minimise the financial/accounting impact, MQ Research reiterate: IFRS9 standards dictate a day-one adjustment will be taken in 2QCY20. Coupled with high provisions expected during the quarter and further net interest margin (NIM) compression, MQ Research flags that CIMB/ AMM risk posting reported losses in 2QCY20. That said, MQ Research remains comfortable with the banks’ capital buffers (12.2%-16% common equity tier 1 (CET1)). It was reported that banks are seeking relief from regulators/the government; MQ Research expects tax breaks/ lower cost of funds may be offered, potentially offsetting 50% of the economic burden. Unlike the losses, however, these cannot be booked on Day-1.

Credit Costs: Front-loading ECL’s

1QCY20 results saw sizable downgrades to net credit cost (NCC) guidance, with CIMB/MAY guiding 120/100bps on the high end. RHB’s 30-35bps looks optimistic, PBK’s/HLBK’s 15bps/25bps more reasonable. MQ Research expects aggressively front-loaded ECL provisions and now forecast a +170% y/y jump in FY20 (previously +20%), followed by moderating -38% y/y drop in FY21. That said, substantial uncertainty remains in FY21 when the first wave of NPLs will emerge as moratoria expire.

Another 50bps OPR Cuts

As MQ Research has articulated, its house view is for another 50bps cut to the overnight policy rate (OPR) in 2H20, on top of the 100bps cuts to date, as BNM takes advantage of the disinflationary environment to deliver further monetary stimulus. The resulting NIM compression underpins MQ Research’s 7% downgrade to FY20 net revenue, with PBK the most sensitive to rate cuts; it has the lowest non-interest income ratio.

12-month Target Price Methodology

• CIMB MK: RM4.50 based on a Price to Book methodology
• RHBBANK MK: RM6.20 based on a Price to Book methodology
• HLBK MK: RM16.30 based on a Price to Book methodology
• PBK MK: RM16.20 based on a Price to Book methodology
• MAY MK: RM7.20 based on a Price to Book methodology
• AMM MK: RM2.85 based on a Price to Book methodology

Source: Macquarie Research - 12 Jun 2020