Lenders seen to boost profits in next two years


PETALING JAYA: The solid performance by most banks in the first quarter (Q1) of the year puts the banking sector on track for robust earnings growth over the next two years.

Consequently, analysts have remained largely overweight on the sector despite the ongoing movement restrictions, which is seen to have some impact on economic recovery.

According to Maybank IB Research, banks posted a 27% year-on-year (y-o-y) increase and a 59% quarter-on-quarter (q-o-q) jump in cumulative core net profit for the first three months of 2021.

This growth was mainly supported by a healthy recovery in net interest margins (NIM), still healthy non-interest income (NOII) growth of 14% y-o-y, controlled expenses and stable loan loss provisions at +3% y-o-y.

Excluding one-off items, the research house noted that the results of Malayan Banking Bhd, CIMB Group Holdings Bhd, Public Bank Bhd, RHB Bank Bhd and BIMB Holdings Bhd had beaten consensus estimates, while AMMB Holdings Bhd and Hong Leong Bank Bhd’s earnings were in line.

Only Alliance Bank Malaysia Bhd’s results were below consensus.

Adequate pre-emptive provisions augur well for sectorAdequate pre-emptive provisions augur well for sector

As such, Maybank IB has raised its 2021 aggregate core net profit growth to 23% from 19% previously on the back of operating profit expansion amidst assumptions that credit costs will remain elevated.

“We have upgraded the 2021 operating profit growth to 3.9% from 0.1%, predominantly on the upgrade of NIM assumptions. We also project core operating profit and net profit growth of 2.5% and 12.8%, respectively, for 2022, ” Maybank IB said in a report.

It noted that average NIMs had plunged a hefty 37 basis points (bps) back in Q2 of 2020, exacerbated by modification losses as well as a total of a 125-bps rate cut in 2020.

“The recovery in NIM has been aided by several factors, including the cessation of rate cuts, the surge in current account savings account (CASA), the repricing of fixed deposits and modification gains for some banks.

“On an aggregate basis, NIMs improved by eight bps q-o-q to 2.28% and had in fact surpassed the NIMs in 2018/2019. All banks, but Alliance Bank, saw Q1 of 2021 NIMs recovering beyond Q1 of 2020 levels, ” the brokerage added.

On the other hand, NOII is expected to moderate amid potentially higher bond yields, while expenses are likely to see some growth as banks normalise operations and amid higher marketing and digital spend.

Cumulative gross loans for the banks in Maybank IB’s coverage rose 3.9% y-o-y during the quarter, while domestic loan growth was a faster 5.4% y-oy.

Meanwhile, it noted that Targeted Repayment Assistance (TRA) loans made up about 13% of total loans, which is down slightly from 14% at the beginning of this year. Retail loans under TRA made up 11% of total retail loans and the percentage is a higher 15% for non-retail loans.

“Impaired loans to-date remain stable in absolute quantum for loans under the TRA plan and/or under restructuring/rescheduling that need not be classified as impaired. But in our view, the current lockdown exacerbates the risk of defaults rising, ” it said.

However, UOB Kay Hian Research (UOBKH) opined that vulnerable groups could be more resilient than expected.

“Note that on average, the B40 income segment consisted only of 8%-13% of most banks’ total loans base. During the last opt-in moratorium for B40 and vulnerable groups in Q4 of 2020, most banks reported that on average, 70% of them have exhibited normalised loan repayment by February-March 2021, despite the re-implementation of the movement control order (MCO) 2.0 in Q1 of 2021, ” it said.

UOBKH also noted that there were adequate pre-emptive provisions factored in despite MCO 3.0.

“Our current pre-emptive provision assumptions for the banks in general imply that we expect close to 35% of the sector’s current loans under targeted assistance (11% of gross loans) to be eventually impaired once the targeted assistance programme ends

“This essentially implies that the system gross imparied loans (GIL) ratio could rise by 3.5 times to 5.2%. Taking into account the above-mentioned factors, the relatively high pre-emptive credit cost that the banking sector has already built in and a much swifter rollout of Covid-19 vaccinations from June 21 onwards, we make no changes to our lower credit cost outlook for 2021 despite the re-implementation of MCO 3.0, ” it said. As such, the brokerage sees the sector’s current consolidation phase as an excellent opportunity for investors to accumulate on weakness.

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