Kenanga Research keeps Neutral outlook on banks


  • Banking
  • Thursday, 30 Jul 2020

Kenanga Research said RHB Bank (OP; TP: RM5.75) is its top sector pick on attractive valuations and solid capital ratios to absorb higher loan allowances while maintaining a decent dividend payout.

KUALA LUMPUR: Kenanga Investment Bank Research is maintaining its Neutral sector call on the banking sector as the Overnight Policy Rate (OPR) cycle that is now closer to the bottom.

It said on Thursday the Day One Modification losses that may not be as bad as initially feared are positives for the sector.

“In addition, currently trading at FY21E PE of 11.4 times and PBV of 0.8 times, we think sector valuations are decent. However, what keeps us from turning more constructive on the sector is the lack of visibility on asset quality, ” it said.

On Wednesday, Prime Minister Tan Sri Muhyiddin Yassin announced banks will continue to assist borrowers after Sept 30, but with a more focused and targeted approach catering to individuals and SMEs that continue to be affected by the pandemic

Muhyiddin said there was an extension of loan moratorium by a further three months for individuals who have lost their jobs in 2020 and are still unemployed.

There would also be a reduction in loan instalment for individuals who are still employed but have seen in salaries. The reduction in loan instalments will be in proportion to their salary reduction for a period of at least six months.

For HP loans, affected borrowers will be offered revised instalment schedules that are in line with the HP Act.

“We believe this is to help mitigate the impact of Day One Modification losses that the banks experienced under the current loan moratorium programme, ” said the research house.

Kenanga Research said RHB Bank (OP; TP: RM5.75) is its top sector pick on attractive valuations and solid capital ratios to absorb higher loan allowances while maintaining a decent dividend payout.

“In addition, it is less impacted by Day One modification losses. We also like Hong Leong Bank (OP; TP: RM17) as a defensive, ‘high quality’ bank with a strong digital infrastructure that is poised to benefit from a post Covid-19 environment.

“AMMB’s (OP; TP: RM3.60) valuations are undemanding and we think the stock could be an attractive catch-up play, ” it said.

However, Kenanga Research said questions that still linger:

1.Proportion of moratorium loans that require further support? In its previous conversations with some of the banks, the banks were unable to provide more colour at this stage as to the proportion of moratorium loans that may require further support.

Partly, this was because the process of affected borrowers (especially retail borrowers) approaching the banks have been “slow”. Wednesday’s announcement provides better clarity as to the options available to affected borrowers and this may speed up the process of these borrowers coming forward.

2.Higher ECL for these impacted loans? It does not discount the possibility that some or all of these loans may be considered as R&R cases and the banks may need to set aside higher ECL reserves if earlier pre-emptive provisioning prove inadequate.

Thus, there could be upside risk to 2020F credit cost guidance, but the flipside is a “cleaner slate” for banks to move forward.

3.How high can GILs rise? It believes these measures will serve to keep asset quality in check in the near term(such R&R cases may not need to be classified as impaired), but visibility further out remains cloudy and thus, it is difficult to assess the adequacy of loan impairments that the banks are setting aside.

4.Operationalisation of the assistance.

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