PETALING JAYA: Banks’ asset quality will likely be the key swing factor to earnings in the sector in the coming quarters, according to a Kenanga Research report.
The research unit noted that the recent reporting season showed further loans loss provisioning by the banks with earnings visibility still opaque.
Kenanga Research pointed out that October saw system loans momentum moderating slightly (4.3% jump year-on-year) as the conditional movement control order kicked in while the curtains fell on the loan moratorium period for individuals and small and mid-size enterprises (SMEs).
Also, household loan disbursements fell 7% year-on-year despite double-digit loan applications in the preceding month.
The research unit said loan leading indicators were not favourable as demand for business fell, and households’ demand moderating in October with subdued applications.
Liquidity was still ample at 10.5% with loan-to-deposit ratio (LDR) and loan-to-fund-and-equity (LTFE) ratio stable at 89% and 72%, respectively.
While banking industry’s gross impaired loan (GIL) ratio saw slight uptick to 1.4%, loan loss reserve continued to amplify to 110%.
The research unit also pointed out that year-on-year, October’s total deposits growth moderated at a 4% jump versus September’s 5% jump.
Deposits from individuals continued at the same pace (7% jump year-on-year) as in September while business deposits were flat (September: 2% jump).
October’s current account savings account (CASA) growth gained pace at 22% (versus September: 20% jump) while fixed deposits continued its decline at 4% year-on-year (September: 3% drop year-on-year).
Kenanga Research expected CASA growth to still maintain its momentum, positively impacting net interest margins (NIMs) for banks given the lower spread between CASAs and fixed deposits (FDs).
Also, the absence of interim dividends from most banks during the recent third quarter results season support the view that the banks are shoring up their capital further.Kenanga Research maintained its “neutral” call on the banking sector and said it preferred banks with solid asset quality such as Hong Leong Bank Bhd (outperform call; target price: RM18.50) and Public Bank Bhd (outperform call; target price: RM20.25).
The research unit said their asset quality track records suggest that the pre-emptive loan provisions required should be lower relative to peers while the smaller exposure to the corporate space should shield them from chunky loan impairments.
It opined that these banks offer investors better earnings predictability and “safer” dividend yields (assuming banks continue to be conservative with dividend pay-outs).
Kenanga Research also liked RHB Bank Bhd (outperform call; target price: RM6.30) for its capital strength.
While this may not translate to higher dividend pay-outs vs peers in the near term, RHB Bank should be able to resume its capital management plans relatively quick once the Covid-19 pandemic is past (versus peers that may need time to rebuild their capital positions).
BIMB Holdings Bhd (outperform call; target price: RM4.95) is also Kenanga Research’s pick as a catch-up play as it offers a cheaper entry into Takaful Malaysia.
Furthermore, its asset quality is solid after Public Bank and Hong Leong Bank.
Its dividend declared in the recent reporting quarters implies robust asset quality and that it is likely to see minimal impact post the targeted assistance programme.