In a report released yesterday (14 Oct), Macquarie Equities Research (MQ Research) had mostly positive takeaways from Bank Negara Malaysia’s (BNM) 1H20 Financial Stability Review (FSR) and analyst briefing, with credit risks not as bad as initially feared.

FSR Highlights

• The overall takeaway from the FSR briefing was positive, from the content of the report to the tone and outlook of the central bank. While uncertainty persists (e.g., the recent CMCO), the hard lockdown in March/April is now the demonstrable low-point of the crisis. The central bank reiterated the positive trajectory of macroeconomic data, albeit an uneven recovery (high touch service, tourism, oil and gas continue to lag), for example, guiding for continued decline in unemployment, on stable rehiring activity and decelerating layoffs. Indicators of financial resilience were also encouraging, says BNM, with R&R (restructuring and rescheduling) for individuals and small and medium sized enterprises (SME) coming in at ~600,000 applications to date – much lower than the 3 million initially anticipated. Following the moratorium expiry, loan repayments have rebounded to 70% already and are expected to rise further.
• Stress test: BNM’s refined stress test anticipates loan impairments will peak at 4.1% by end-2021 (June: 1.6%) – in MQ Research’s view, far from an alarming figure. Households are expected to drive 12% of said impairments, with 42% coming from large corporates and the balance from other businesses. In turn, this is expected to trim 140bps from sector common equity tier 1 (CET1) ratio to 13.2%; still well above statutory requirements. The stress test assumes banks will see default 8x historical rates (vs Asian Financial Crisis, impairments rose 3-5x).
• Policy ammunition: Outside of further interest rate cuts (arguable, little more to cut and effectiveness is low) a broad range of policy tools are still available to the central bank, to blunt the impact of further shocks. BNM emphasised that it still has funds in reserve to deploy additional funding support to businesses (e.g., directly via Special Relief Fund or indirectly via guarantees like Credit Guarantee Corporation). In addition, BNM will ensure banks’ do not adopt excessive risk aversion, instead providing policy flexibility (e.g. transitional capital accounting) to ensure supply of credit remains supportive of economic recovery; positive for asset growth.
• Capital management: While stressing that banks remain adequately capitalised, BNM did not provide meaningful insight into policy regarding banks’ dividend payouts. The complete absence of interim dividends in 1H20 suggests high conservatism. MQ Research anticipates FY20/21 dividends may disappoint on the downside, and will hinge on uncertainty of outlook.

Outlook

• The FSR affirms MQ Research’s constructive view on the economy vs a reasonable credit cost cycle from the crisis. MQ Research reiterates RHB/CIMB as its top sector picks – both are cheap recovery plays. HLBK is MQ Research’s preferred defensive pick over Public Bank. Least preferred banks are Maybank and AmBank.

Source: Macquarie Research - 15 Oct 2020