"We continue with our view that asset quality will likely be the key swing factor to earnings ahead.
"This recent reporting quarter shows further loans loss provisioning by the banks with earnings visibility still hazy," said the research house.
The take-up rate for the targeted repayment assistance offered by the banks is quite muted although it could increase depending on the impact of the current CMCO.
"As previously guided, post moratorium assistance is expected for 10-15% of their loan book with most banks reporting such numbers so far.
"B40 exposure by the banks are relatively minimal with most reporting low teens exposure to their loans book; AMMB, CIMB and PBK reported c.10% or below while those in low teens are Maybank (13%) and PBK (12%) while RHB reported 14% under its retail loan book," said Maybank IB.
The research house also does not discount further overlays in 4Q due to repayment slippage given the prolonged CMCO.
However, the aggressive pre-emptive provisioning will give a much more optimistic credit costs level for 2021, it added.
More positively, net interest margins are expected to improve due to the absence of further overnight policy rate cuts supported by repricing of deposits and unwinding of modification losses.
"Special Relief Facility (SRF) is another contributing factor in elevating NIMs. While there will be additional modification losses in 4Q, it will likely be minimal given it’s a targeted 3-month moratorium.
"Some banks reported better CASA growth (in high single-digit) given the narrowing spread between FDs and CASA as depositors prefers to hold cash," it added.
The recent 3Q20 earnings period saw most banks meeting expectations with the absence of Day 1 modification loss.
Maybank, Malaysian Building Society, Public Bank and RHB came in ahead of Kenanga's and consensus expectations at over 80% of full-year estimates.
However, the research house considers them as broadly tracking expectations due to revised credit cost guidance and further loan provisioning expected in 4Q.
Affin Bank, Alliance Bank, BIMB and Hong Leong Bank recorded results that were within Kenanga's and consensus full-year estimates.
AMMB's 1HFY21 core net profit came to 52% of the research house's and consensus estimates but was considered to be below given the revised credit cost guidance.
CIMB's 9MFY30 make up just 57% and 51% of respective estimates due to impairments in its bond book.
On its sector picks, Kenanga said it preferred banks with solid asset quality such as Hong Leong Bank and Public Bank and RHB for its capital strength.
BIMB remained its top pick as a catch-up play offering a cheaper entry into Takaful Malaysia.
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