The research house, which has an underweight stance on the banking and financial services sector, says it is forecasting a 28.6% year-on-year (y-o-y) contraction in the sector in 2020. However, it added that the sector return on equity remains at a 22-year low.
For 2021, the research house anticipates a 13% y-o-y recovery in core net profit.
"We maintain our underweight stance on the Banking and Financial Services sector, despite raising our target prices and stock ratings (in our Market Strategy on 16 June) to reflect a lower equity risk premium, in line with the return of risk appetite.
"Nonetheless, we advise investors to exercise caution, due to the heightened risk of unemployment and potential business closures, which will continue to drive up system NPLs," it said.
Moving into 2021, Affin Hwang expects potential increases in Stage 2 and 3 exposures of the banks' loan books to remain a risk due to lower household incomes, rising unemployment and deterioration of businesses' debt-servicing capacity.
It added that banks continue to face asset quality risks from exposure to vulnerable sectors such as oil an gas, real estate and retail/tourism.
Maybank and CIMB in particular will face the threat of NPLs from Indonesia.
The research house's top sector pick is Aeon Credit, which could potentially surprise as return on equity recovers to 14.4% in FY22 with a lwoer net credit cost and more robust receivables growth.