PETALING JAYA: After three consecutive quarters of aggressive provisioning by banks to beef up their buffer against potential bad loans following the Covid-19 pandemic, banks may not need to bulk up like before.
With a more favourable operating environment now, CGS-CIMB Research believes that banks are at a turning point for a loan loss provision (LLP) downcycle from the first quarter of 2021 (Q1’21), which in turn should improve their profitability.
“We are projecting a recovery in banks’ core net profit growth to 6% in 2021 versus an estimated 10.8% slide in 2020, which would be driven by two earnings catalysts, ” it said in its latest report.
The first catalyst is a turnaround in the growth of net interest income from a drop of 4.5% in 2020 to an expansion of 4.7% forecast in 2021 on the back of stable interest rates this year.
Second, is “a projected decline of 37.7% in LLP vis-à-vis a surge of 167.3% in 2020.
Banks’ LLP had surged to a high of RM4.54bil in Q420 causing net profit for that period to tumble by 33% year-on-year (y-o-y).
“We believe that banks’ LLP would have peaked in 4Q20 and are at an inflection point for an LLP downcycle in Q121, ” it added.
It notes that a positive take from the banks’ Q420 results was a return to y-o-y growth in net interest income, after declines in the previous two quarters.
This was in line with the research firm’s expectation, given the absence of an overnight policy rate (OPR) cut in Q420, leading to a 7 basis point quarter-on-quarter (q-o-q) expansion in net interest margin (NIM).
Not expecting an OPR cut in 2021, CGS-CIMB expects NIM to continue to improve q-o-q in Q121 and Q221.
In terms of banks’ return on equity (ROE), it had dipped to 6.5% in 4Q20, from 10.1% in 4Q19 and 7.7% in 3Q20.
This was due to a 33% y-o-y drop in Q420 net profit vis-à-vis the 4.5% y-o-y rise in shareholders’ funds at end-Dec 2020.
Notably, banks’ ROE has been suppressed at single-digit rates in the past four quarters since the start of the Covid-19 outbreak in early-2020.
On a more positive note, the two earnings catalysts should more than offset the three negative trends CGS-CIMb expects this year.
These are slower loan growth of 2-3% versus 3.4% in 2020; a projected 4.5% drop in non-interest income and a 9.5% increase in overheads in 2021 after coming in almost flattish last year.
The research firm reiterates its “overweight” call on the sector underpinned by the expected recovery in banks’ net profit growth. It’s top picks for the sector are Public Bank Bhd, Hong Leong Bank Bhd and RHB Bank Bhd.
It noted that none of the Malaysian banks have been able to rival Public Bank’s operational efficiency, as reflected by its consistently lowest cost-to-income ratio, which stood at 32.7% in 4Q20. This was significantly below the sector’s average of 44.4%.