In its report on Thursday, it said Public Bank and Hong Leong Bank scored the highest at 37 to 38 points versus peers’ 10 to 24 points.
To address market concerns about the expected rise in gross impaired loan (GIL) in 2021F, it took a closer look at banks’ defensiveness against credit risks, including estimating collateral coverage and provision buffer against future GIL based on its own assumptions.
“Our findings reveal that collateral coverage for banks under our coverage is strong at an average of 79.3% in FY21-22F while banks’ provision buffer can cover up to 80.5% of a rise in GIL (from the end-Jun 20 level).
“Banks’ robust coverage gives us comfort to retain our Overweight rating on banks despite the expected rise in GIL in 2021F. A potential rerating catalyst for banks is the projected rebound in net profit growth to 14.8% in 2021F. Potential downside risks would be higher-than-expected 2021F GIL and provision,” it said.
In the report, CGS-CIMB Research we ranked the eight Malaysian banks under our coverage by five indicators to assess their defensiveness against credit risks.
The indicators are (1) the peak GIL ratio in the past 20 years (2000-19) (banks with lowest peak ranked at the top and vice versa), (2) collateral coverage, (3) loan loss coverage (LLC) (including regulatory reserve), (4) total buffer coverage, and (5) % loan exposure to residential mortgages.
It said with Public Bank and Hong Leong Bank scoring at 37 to 38 points versus peers’ 10 to 24 points, they are potentially the most defensive against any increase in the industry’s GIL in 2021F arising from the Covid-19 outbreak.
It also ran stress tests on banks’ FY21F net profits (FY22F for AMMB and Alliance Bank) assuming that (1) the GIL ratios are doubled at end-Dec 2021F from the levels at end-June 2020, and (2) banks maintain a loan loss coverage (including regulatory reserve) of 80% at end-Dec 2021F.
The results from the stress test show the impact would be the smallest on the FY21F net profits (NP) for three banks, namely Public Bank, Hong Leong Bank and BIMB as the total provision buffer of these banks can cover the additional provisioning from the doubling of their GIL ratios.
“We advocate investors take positions in Public Bank and Hong Leong Bank, which are our top picks for the sector, as we think that the NP of both banks will be the least impacted among their peers should the industry’s GIL ratio spike in 2021F.
“We also have Add calls on (1) RHB Bank as we expect the new bancatakaful agreement to drive its fee income growth in FY21F, and (2) AMMB due to its attractive valuation of 7.1 times CY21F P/E,” it said.
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