Affin Hwang maintains 'underweight' on banking sector, sector earnings to fall

  • Analyst Reports
  • Monday, 01 Jun 2020

KUALA LUMUR: Affin Hwang Capital research has maintained its "underweight" call on the banking sector as it expects a deterioration in earnings moving forward.

It added that Bank Negara's additional relief measures will put futher pressure on liquidity and funding.

The research house said in an update that it expects 2020 bank sector earnings to potentially decline by up to 24.3% year-on-year (y-o-y), with a modest recovery of 3.9% y-o-y to take place in 2021.

Among its assumptions for 2020, Affin Hwang expects systems loans to decline 1% y-o-y. April data showed more credit required for certain business sectors while household loans were relatively flat month-on-month.

It also expects the banking sector's liquidity coverage ratio and net-stable-funding-ratio to continue declining in the next six months due to the liquidity needs of banks during the six-month moratorium period.

In April, the sector's liquidity coverage ratio (LCR) remained comfortable at 144% while the loan-to-fund ratio slipped slightly to 82.5%.

The research house forecasts 2020 net interest margin (NIM) to decline to 1.95% from 2.1% in 2019 as the average lending rate of commercial banks trended lower to 4.26% following the additional 25bps rate cut in March. A NIM recovery is anticipated in 2021 to 2%.

Systems outstanding impaired loans rose 5% year-to-date while system GIL ratio stood at 1.58%, due to some stress in lending to certain sectors.

For its sector pick, Affin Hwang favours ELK-Desa. "We believe that ELK-Desa remains a prudent mass-market used-car financing player in the Klang Valley.

"Though the near-term outlook remains cautious, in the longer term, we see room for growth in the Klang Valley, due to its close relationship with a network of car dealers and the huge opportunity to finance cars at market values of under RM35,000," said the research house, which has a "hold" call on the stock with a target price of RM1.13.

It forecasts a receivables growth rate of 5.8% y-o-y in FY21 for ELK-Desa as compared to a projected growth rate of 17% y-o-y in FY20.

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