KUALA LUMPUR: Despite the current low interest rate environment, the gradual recovery in the economy will support an eventual uptrend in the interest rate cycle and drive banks’ core net interest income (NII) higher in future quarters.
Similarly, a stronger market would enable stronger fees and commissions for non-interest income (NOII).
As such, analysts have remained largely overweight on the banking sector despite the reintroduction of another automatic loan moratorium.
In a report yesterday, AmInvestment Bank said it anticipated an improvement in underlying interest margins and expects an improvement in NOII, particularly in the second half of the year.
Nonetheless, it tweaked the sector’s calendarised core earnings growth for 2021 slightly to 30.8% from 31.5% after making adjustments for certain credit cost assumptions.
For 2022, the research house forecasts an earnings growth of 11% for the sector.
AmInvestment also noted that another catalyst for the sector is the stabilisation of provisions with a potential reversal of management overlays and prudent macro provisions once the worst in asset quality woes is over.
Notably, last year saw banks front-loading provisions, building up significant preemptive allowances for loan losses in the form of management overlays and/or macro provisions.
The first quarter of 2021 continued to see banks being conservative, topping up their provisions.
Note that AMMB Holdings Bhd made macro provisions of RM304mil, Malayan Banking Bhd (Maybank) allocated RM200mil in provisions as management overlay and RHB Bank Bhd made RM94mil additional pre-emptive provisions for potential impact of Covid-19 effects.
Meanwhile, CIMB Group Holdings Bhd had RM103mil overlay for its Indonesia consumer loan portfolio, Alliance Bank Malaysia Bhd had RM89.1mil overlay and Hong Leong Bank Bhd’s preemptive provisions came in at RM55mil.
“On a comforting note, the provision buffers built up by banks since last year are largely unutilised, thus are anticipated to cushion against the impact of the latest lockdown,” AmInvestment said.
The brokerage expects to see banks conservatively topping up provisions for the latest six-month moratorium.
“Nevertheless, we do not expect these additional overlays to be substantial in amount unlike that seen in 2020.
“This is on the expectation that the economy will progress towards recovery with the gradual opening of more economic sectors after achieving herd immunity against Covid-19 through mass vaccination,” it said.
The sector’s gross impaired loan is expected to remain stable, or inch slightly higher, from the present 1.6% towards the end of 2021.
The continued availability of repayment assistance to loan borrowers – including the six-month moratorium, the option of a 50% reduction in monthly installments over six months and restructuring and rescheduling – is expected to keep banks’ impaired loans stable for the next six months.
Given their strong capital positions, AmInvestment noted that valuations for banking stocks remain compelling.
Its “overweight” stance on the sector is supported by its top picks: CIMB (fair value or FV: RM5.60), RHB Bank (FV: RM6.90) and Maybank (FV: RM10.40).
“We like CIMB, RHB and Maybank due to the expected improvement in core operating income coming from the gradual improvement in regional operations performance, progressive improvement in underlying NIMs and provisions for loan losses.
“Earnings of these banks are expected to benefit from the improved performance of their Singapore operations, which in 2020 were affected by provisions (overlays and specific provisions).
“Also, we continue to see compelling valuations for these stocks and strong capital positions, particularly the robust capital ratios of RHB Bank.”