Solid comeback by banks

Banks profit

PETALING JAYA: The banking sector is expected to make a solid comeback in earnings this year following the pandemic shock in 2020.

The optimism is backed by healthy financial indicators that have been displayed thus far by the industry.

Not only did most banks record strong earnings growth for the first quarter ended March 31, 2021, they also saw positive trends in non-interest income, loan growth and asset quality, among others.

Banks also registered continuous expansion in net interest margin (NIM) at an average of five basis points year-on-year (y-o-y) in the first three months of the year, while loan loss provisioning (LLP) fell an average of 39.5% quarter-on-quarter (q-o-q).

According to CGS-CIMB Research, these are key catalysts supporting an expected recovery in banks’ core net profit growth in 2021.

The brokerage said while the lockdown, which has been extended to June 28, posed downside risks, it is not expected to derail earnings recovery of banks this year.

“We reckon that the lockdown could pose downside risks to banks’ 2021 earnings growth in the form of slower loan and fee income growth and hike in gross impaired loan ratio.

“These could reduce our projected core net profit growth for 2021 but we believe banks are still on track for a recovery in 2021, especially after the core net profit of banks under our coverage increased by a solid 11.6% y-o-y in the first quarter of 2021, ” CGS-CIMB Research said in its report.

The research house projected a growth of 9.4% in core net profit for banks this year, after a 10.8% drop in 2020.

“The earnings catalysts would be our forecast of 8.3% growth in net interest income in 2021 (versus a decline of 3.6% in 2020), on the back of an expected stable overnight policy rate (OPR) throughout 2020; and our projected decline of 34.7% in 2021 LLP (versus a 172% surge in 2020), as banks had frontloaded most of their provisions related to Covid-19 in 2020, ” CGS-CIMB Research said.

It maintained its “overweight” call on banks, with Public Bank Bhd, Hong Leong Bank Bhd and Malayan Banking Bhd as it top picks.

CGS-CIMB Research said while the sector’s core net profit could decline q-o-q in the three months to June 30, 2021, due to the lockdown, the sector could still achieve a double-digit y-o-y core net profit growth at more than 10% in the second quarter of this year.

This annual growth, it said, would be driven by continuous improvement in NIM due to stable OPR in the first half of 2021, and a lower LLP compared with the RM4bil registered in the second quarter of 2020, the second-highest ever quarterly LLP.

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