Following the third wave of Covid-19 and the movement restrictions in Klang Valley and Sabah, Macquarie Equities Research (MQ Research) thinks that there will be risk of further downgrades to credit cost guidance while the manufacturing/industrial business may have a mild impact. MQ Research is positive on Bank Negara’s decision to keep the interest rate unchanged, hence sharing its bank’s preferences including RHB and CIMB.

Key Points

• When banks report 3Q20 results this month, they will have two months of post-moratoria data and CMCO impact to assess downside risk.

• Bank Negara’s decision to maintain the overnight policy rate at 1.75% is positive; suggests recovery trajectory is intact despite challenges. MQ Research assumes -25bps in their base case.

• Seeking inflection: expect further provision guidance downgrades in 3Q20, but if that bottoms out in 4Q20, could be the start of a re-rating.

3Q2020 Preview: Damage Assessment

• The third wave of COVID-19 and ensuing restrictions in Klang Valley and Sabah will be front and centre in banks’ 3Q20 post-results briefs. MQ Research thinks there is risk of further downgrades to credit cost guidance but of a relatively small quantum. Banks face less uncertainty vs April/May lockdowns. Without automatic moratoria, banks have much better information on borrower delinquencies, in addition to the rigorous bottom-up assessments of borrower strength that have been undertaken throughout the year. Feedback from banks is still mixed – while some have shifted from optimism to caution, others have indicated minimal spikes in delinquencies due to tightening lockdowns.

• MQ Research expects that the direct impact of Klang Valley’s Conditional Movement Control Order (CMCO) will be relatively mild for manufacturing/industrial businesses. Manufacturing stats show a robust post-lockdown recovery in production (as of August), while businesses have become leaner by shedding excess headcount. Instead, the retail/F&B sector will bear the brunt – not directly because of CMCO, but due to consumers avoiding crowded/high-risk areas. Retailers/F&B have been pivoting to e-commerce/food delivery to blunt the impact, but high-touch services (e.g. hairdressers) are still at high risk. The fledgling recovery of the hospitality sector will also be crushed in the short-term as gatherings are banned (e.g. weddings). Implementation of the Temporary Measures for Reducing the Impact of the COVID-19 bill 2020 should also blunt the impact on borrowers – for example, by limiting landlords from recovering rent in arrears. While the risk ultimately accumulates for banks, MQ Research expects banks’ move of extending restructuring and rescheduling (R&R) will prove effective in smoothing over the bumps on the road to recovery.

Data points were encouraging up to September

• Data points suggested a robust post-lockdown recovery in the Malaysian economy: labour market, repayment data, consumption indicators and manufacturing stats. Following a relatively optimistic Financial Stability Review, Bank Negara surprised marginal consensus expectations by holding interest rates unchanged this week. In MQ Research’s view, this underscores a lower risk/less uncertain outlook and improving financial conditions despite CMCO’s challenges. The next Monetary Policy Committe meeting is Jan 19/20.

Outlook

MQ Research maintains its selective overweight view of the banking sector and preference for banks trading at depressed valuations – RHB and CIMB. MQ Research’s order of preference: RHB > CIMB > HLB > Public > Maybank > AmBank. Inflection in valuations could come as soon as late-Feb on peaking provision guidance and cessation of foreign selling pressure.

Source: Macquarie Research - 5 Nov 2020