KUALA LUMPUR (Aug 2): Analysts remained bullish on banks despite slowing lending growth in the sector and weakening asset quality in June.
UOB KayHian analyst Keith Wee said today in a note that banking system lending growth for June moderated to 3.4% from 3.9% yoy (yoy ) in May, but he thinks it could be of a “temporary” nature as the tighter lockdown from June may have impacted loan disbursement, which is expected to pick up from 3Q21.
Wee still expects the system’s loan growth for the full year of 2021 to mark a modest recovery to 4% from 3.4% in 2020.
Although the extended foreclosure has raised fears that there is an upside risk to the cost of credit this year, he believes it is unlikely to exceed 2020 cost of credit levels by 82 basis points. , because most banks have sufficiently provisioned vulnerable groups.
“Even if we were to assume that the cost of credit for the sector 2021 [was] To reflect 2020’s 82 basis points from our current estimate of 65 basis points, we still expect the industry to post 12% year-on-year profit growth (vs. current growth estimates of 25 %). This will be supported by a slight improvement in the net interest margin, stronger loan growth and mid single-digit growth in non-interest income, ”Wee said.
He maintained his call “overweight” on the sector, believing that “the current phase of consolidation of the sector offers an excellent opportunity for investors to accumulate on the weakness”.
“The sector is still expected to post healthy earnings growth even if provisions were to surprise on the upside in 2021, while the Tier 1 (CET1) ratio of 14.8% is well above the requirement minimum, ”he said.
CIMB Group Holdings Bhd (target price [TP]: RM5.10) is Wee’s first choice for the banking segment as he believes the group is best positioned in the industry to take advantage of the economic recovery and the reopening theme, given its strong profit growth over low base, attractive valuations, large caps and high beta liquid nature.
He also likes Hong Leong Bank Bhd (TP: 22.30 RM) and Public Bank Bhd (TP: 4.60 RM) for their strong track record of asset quality, and RHB Bank Bhd (TP: 6.35 RM) for its strong capital position and well-balanced growth.
Meanwhile, Hong Leong Investment Bank Research analyst Chan Jit Hoong said in a note today that loan growth in June was below his growth estimate of 3.5% to 4% for FY21, which led it to revise its forecast to 3% to 3.5%, especially with the persistent headwinds of Covid-19.
According to Chan, the sector’s asset quality also showed some weakness, with the gross impaired loan (GIL) ratio increasing three basis points month-on-month to 1.62%.
“We expect the GIL ratio to continue to rise, but we would not be too concerned as the banks made a large preemptive provisioning in FY20 and we believe the credit risk has been properly taken into account by the market, given the high net cost of credit (NCC). assumption used for FY21 by both us and the consensus (above the normalized execution rate but below the level of FY20) “, did he declare.
“In addition, the government and the BNM will remain in favor of helping borrowers in difficulty, limiting a significant deterioration in the GIL ratio,” he added.
He kept his ‘overweight’ call on the banking sector, saying even with the nationwide lockdown he remained bullish on the sector given the rollout of the Covid-19 vaccination, undemanding valuations and liquidity abundant market.
“Therefore, any liquidation is an opportunity for accumulation, in our opinion,” he added.
For large banks, Chan likes Malayan Banking Bhd (Maybank) (TP: 9.40 RM) for its strong dividend yield, and Public Bank (TP: 4.50 RM) for its defensive qualities, compared to CIMB (TP: 4.60 RM). ).
For mid-sized banks, he said that RHB (TP: 6.85 RM) is more favored than AMMB Holdings Bhd (TP: 2.85 RM) because the former has a higher CET1 ratio and also fair value. higher via other comprehensive income reserves as a buffer against potential yield curve volatility.
For smaller banks, he said BIMB Holdings Bhd (TP: 5.20 RM) and Affin Bank Bhd (TP: 2.15 RM) are preferred over Alliance Bank Malaysia Bhd (TP: 2.60 RM). Chan said he liked the former given its positive long-term structural growth drivers and better asset quality, while the latter had the potential for value creation.
CGS-CIMB Research analyst Winson Ng noted in a report today that total industry lending rose 1.6% in the first half of the year, resulting in an annualized rate of 3.2% .
“This was in line with our forecast for loan growth of 2.5% to 3.5% for 2021, although we take into account a slowdown in loan growth in the second half of the year. In addition, the automatic moratorium on loans, which banks began offering on July 7, should support the growth of bank loans, as moratorium loans would not be repaid within 3 to 6 months, ”he said. declared.
He also said that the increase in the GIL ratio was expected given the credit risks triggered by the Covid-19 pandemic.
He expects the GIL ratio to continue rising to reach its 2% forecast at the end of 2021.
Ng noted that the total provision for banks only increased by 978.1 million ringgit in 2Q21 compared to 2.04 billion ringgit in 1Q21 (for [q-o-q] comparison) and RM 1.24 billion in 2Q20 (for year-on-year comparison).
From there, he deduced that the cycle of decline in banks’ loan loss provisioning (LLP) continued in 2Q21F, with probable year-on-year and quarter-on-quarter declines in 2Q21F LLP.
“This, along with the expected year-over-year expansion of banks’ net interest margin, should have been the driving force behind bank profits in 2Q21F. These likely more than offset weaker growth in loan and fee income (due to foreclosure), leading to a year-over-year increase in banks’ core net income in 2Q21 (stable or better quarter-on-quarter) ” said Ng.
He reiterated his call for banks to be “overweighted”, based on the sector’s expected recovery in net profit growth to 9.4% in 2021.
His choices for the industry are Public Bank (TP: RM 5.30), Hong Leong Bank (TP: RM 20.78) and Maybank (TP: RM 9.10).