The preliminary Bank Negara numbers suggest that the 3Q21 banking sector profit before tax (PBT) dropped by 12% quarter-on-year (q/q), mainly dragged by the higher provisions, which was expected. Meanwhile, the preliminary headline net interest income (NII) which fell by 6.3% q/q was higher than Macquarie Equities Research (MQ Research) has initially anticipated as the banks have not been able to properly accrue interests. Looking ahead, MQ Research has lowered bank’s earnings for FY21/22 and thinks that banks may maintain the elevated payout rations. MQ Research reiterates its preference for consumer-centric banks with RHB as its top picks.

3Q21: Modification losses and provision timing

• Preliminary Bank Negara numbers flag -12% q/q (+19% year-on-year (y/y)) banking sector profit before tax, with return on equities (ROEs) dipping to 9.5% (2Q21: 9.7%). The main drag in 3Q21 will be higher provisions (expected) and modification losses (higher than MQ Research’s expectations). Core pre-provisioning operating profit (PPOP) is -0.7% q/q, +11% y/y, adjusting for one-offs.

• Modification losses: Preliminary headline net interest income (NII) fell -6.3% q/q in 3Q21, largely driven by one-off modification losses that have been recognised due to the "Pemulih" moratorium (opt-in but with automatic approval). MQ Research’s estimated aggregate impact of RM900m-RM1bn is roughly 25% the scale of 2020’s modification losses. It is also worse than MQ Research’s initially anticipated, as it appears that banks have not been able to properly accrue interest on hire purchase and fixed rate personal loans. MQ Research has incorporated the NII impact in MQ Research’s estimates for FY21/22.

• Provisions: The 25% q/q increase in net provisions is within MQ Research’s expectations as banks had generally under-provisioned in 1HCY21. In 3Q21 results, MQ Research mostly expect that banks will maintain their credit cost guidance with the possibility it may be lowered as banks trim pre-emptive provision recognition and push provisions into FY22 instead (with the exception of Hong Leong Bank and Ambank due to different financial year-ends). Looking ahead, MQ Research thinks peak asset quality stress for the banks has arrived with the economic reopening. While timing of impairment recognition will introduce some noise into FY21/22 reporting, MQ Research holds the view that the market’s emphasis on asset quality will diminish.

Lower FY22E banks earnings by -5.9%; ratings unchanged

• MQ Research has lowered banks’ earnings for FY21/22 to account for the 1) one-off modification losses, 2) one-off “Prosperous Tax” and 3) deferment of provisions from FY21 to FY22. MQ Research lowers aggregate banks’ FY21/22 adjusted net profit by -1.6%/5.9% and have lowered target prices by ~1% on average on unchanged price-to-book (P/B) multiples (since the impact is one-off) but reflecting the impact to book value. MQ Research has also assumed that banks will endeavour to maintain the elevated payout ratios and thus have kept MQ Resarch’s dividend per share assumptions unchanged.

Consumer > Non-consumer

• MQ Research reiterates its preference for consumer-centric banks over non-consumer banks. Headline unemployment declined to 4.5% in September, and MQ Research expects to see continued improvement in line with the economic reopening. MQ Research anticipates consumer banks will enjoy better loan growth from post-lockdown pent-up demand and outperform non-consumer banks that have to grapple with asset quality indigestion, especially in the SME space. MQ Research’s order of preference is: RHB Bank > Hong Leong Bank > Public Bank > CIMB Bank > Maybank > Ambank.

Source: Macquarie Research - 16 Nov 2021