KUALA LUMPUR: Analysts are cautiously optimistic that the banking sector will fare better next year compared to this year, underpinned by improvement in loan growth and expansion in net interest margin (NIM) amid a challenging economic environment.
Many analysts are currently taking a neutral stance on the banking sector in the wake of headwinds, and due to the surge in credit costs post the loan moratorium, moderate loan growth and NIM compression.
An analyst told StarBiz that: “Moving into 2021, banks’ profit performance should see some recovery given the absence of the one-off modification charges.
“In fact, there will be reversal of these modification losses over the life of the loans. NIMs are also anticipated to improve as deposits would have been repriced at lower rates. Any overnight policy rate (OPR) cuts next year is unlikely to be as significant as the 125 basis points (bps) reduction seen up to now.
He said the big uncertainty in the horizon is the extent of potential loan defaults that will emerge after all the loan relief measures end and the corresponding provisions required.
To this end, the analyst noted that banks are already setting aside provisions this year to brace for the increase in bad loans next year.
Malaysian banks’ earnings have taken a beating this year, weighed down by large modification losses, pre-emptive provisions and significant margin compression.
The modification charges came about as banks are unable to charge interest on the loan instalments of hire-purchase loans and Islamic financing under the six-month automatic moratorium. At the same time, margins have been severely compressed by the numerous OPR cuts totalling 125 bps.
Maybank Investment Bank Research projects banks’ net profit to rebound 12% next year after contracting 20% in the second quarter (2Q20) while it stays neutral on the sector and prefers mid-cap stocks for exposure.
“We thus have buy calls on Hong Leong Bank, Hong Leong Financial Group (HLFG), RHB Bank, AMMB and BIMB, ” it said in its research note.
The research house pointed out challenges into the second half of this year (2H20) remain the same: moderate loan growth, ongoing NIM compression, the normalisation of expenses and potentially higher credit costs.
“For the banks in our coverage, we expect 2020 operating and net profit to contract by 0.4% and 20.4% respectively.
“Into 2021, we expect NIMs to expand year-on-year (y-o-y) and loan growth to pick up. However, overheads are expected to normalise while investment income is likely to be weaker year-on-year, ” it noted.
Maybank Research acknowledged that challenges prevail into the 2H20, while the key unknown at this stage being credit costs post loan moratorium. Nevertheless, 2021 should see more stable NIMs and lower (albeit still elevated) credit costs.
Commenting on the second quarter 2Q20 results, it said there was the recognition of modification losses which totaled RM1.78bil (before tax) for the banks under its coverage.Including the modification loss, 2Q20 aggregate net profit dropped 42% y-o-y while 1H20 aggregate net profit contracted 27% y-o-y. Excluding this loss, 2Q20 core net profit declined 21% y-o-y and 1H20 core net profit fell 17% y-o-y.RAM’s co-head of financial institution ratings Wong Yin Ching said the recently announced targeted extension of the loan moratorium beyond September for selected borrowers will also trigger another round of modification losses, although to a much smaller degree.
“Banks’ NIMs were severely crimped by the aggregate 75 bps cut in the OPR in 2Q20, which was compounded by modification charges arising from non-accrual of interest (or profit) on deferred instalments of fixed-rate auto and Islamic financing under the six-month moratorium.
“Although we expect some respite in NIM as deposits are progressively repriced at lower rates, the 25 bps OPR reduction in July along with the likelihood of more cuts on the horizon, will limit the extent of this recovery, ” Wong said.
Loan growth in the banking industry expanded 4.5% in July this year, growing at a faster rate than the 4.1% in June, according to the latest banking statistics released by Bank Negara.
This was driven by a pick-up in household loans as the easing of the movement control order and the various Covid-19 stimulus packages that encouraged consumers to spend on big ticket items such as cars and properties.
The returning consumers’ confidence is good news for the economy, that is expected to rebound after a steep contraction in the second quarter.
CGS CIMB Research has raised its loan growth forecast from zero to 3% for this year. The firm, however, remained neutral on the sector as the faster loan growth could help offset the negative impact from OPR cuts.