PETALING JAYA: While leading indicators were mixed and asset quality still showed weakness in the latest quarter, the Covid-19 vaccination rollout, supportive government measures and undemanding valuations will continue to provide optimism for the banking sector.
Hong Leong Investment Bank’s research unit said this in a note to clients, adding that for the year just ended, system loans growth for the industry gained traction to 3.8% on a year-on-year basis while deposits remained firm at 5%.
“As for net interest margin, we anticipate a squeeze in the first half of 2021, given a budding 25-basis-point overnight policy rate cut, ” it said.
It also expects gross impaired loan (GIL) ratio to creep upwards but said it would not be overly concerned as banks had made heavy preemptive provisioning in the last financial year and it believed that credit risk had been “passably” priced in by the market.
All in all, the research unit remains optimistic on the sector.
“As for sentiment on banks being potentially weighed down by the fiasco surrounding AMMB Holdings Bhd, if any, we see it as a good buying opportunity, ” it said, referring to last week’s announcement that AMMB had paid RM2.83bil to the government in a settlement linked to the financial scandal involving 1MDB.
Meanwhile, Kenanga Research in its report to clients was also optimistic, saying that “while economic conditions may appear pressing, well-managed financial institutions were still successful in gaining headways in balancing market prudence and profitability.”
“The current trying times also bring out solutions in achieving better cost efficiency, ” it said, adding that although provisioning was expected to continue, it believed keeping a medium-term projection of the banking sector’s sustainability could present opportunities for an early entry to solid economic proxies.
“Post-fourth quarter 2020 results season, we have adjusted our calls for several banks and would like to highlight RHB Bank Bhd, Public Bank Bhd and Malayan Banking Bhd as our preference within the large-cap space, ” it said.
Like Hong Leong, Kenanga Research also noted that asset quality among lenders was still a concern.
“January 2021 registered higher impairments with an overall GIL ratio of 1.60%, while the household segment posted improvement, ” it said, adding that based on channel checks, the majority of these accounts were made up of the M40 segments.
Impairments of business loans continued to extend, Kenanga Research said, as economic recovery could still be far from ideal, given the ongoing movement control orders.
Both Kenanga Research and Hong Leong have an “overweight” call on the banking sector, with Hong Leong’s picks for the large-cap space also being Maybank, Public Bank as well as CIMB Group Holdings Bhd.
“While we have an “outperform” call for AmBank, with a target price of RM3.70, we wait for material updates, ” Kenanga Research said.