Banking stocks ride on optimism

PETALING JAYA: Banking stocks have been moving ahead of their results announcements, with some banks inching closer to their 52-week high levels.

The uptrend in such stocks has also helped to push the FBM KLCI higher over the past two weeks, adding over 65 points or 4.34% in the period. Analysts said that investors are looking at banking stocks once again, largely due to improved market sentiment as political squabbles recede and more economic sectors are reopened.

The upcoming results for the banking sector may not be “extremely encouraging”, according to an analyst, but the modification losses and credit cost impact on their earnings would be more “manageable”.

Rakuten Trade head of equity sales Vincent Lau (pic below) believes that the worst is likely over for the banking sector, unless “a new lockdown is announced”.

Rakuten Vincent Lau cqRakuten Vincent Lau cq

“The sector’s non-performing loans should improve and the impact from the ongoing loan moratorium should also be more muted than the first blanket moratorium announced last year,” he said.

With the reopening of more economic sectors and the upcoming Budget 2022 announcement in about two months’ time, Lau said the economy would likely improve.

“In tandem with this, the outlook for the banking sector also improves as it is the barometer of the economy.

“Coupled with the improving political landscape that has boosted sentiment, this could be a reason why investors are looking at banking stocks again,” he added.

Kenanga Investment Bank Bhd head of research Koh Huat Soon, meanwhile, said the uptrend in banking stocks could be more “market related”, rather than because of earnings expectations.

“Banking stocks carry a large weightage on the FBM KLCI. Given the increased economic activities as the economy is reopened, investors who want to benefit from market improvement would choose to invest in banking stocks,” he said.

In addition, banking stocks’ current valuations are also appealing to investors, Koh added.

Within the past two weeks, banking stocks in Malaysia have reversed their movements, following several months of downtrend.

Malayan Banking Bhd, for example, had been on a downtrend since March this year, but the share price has increased by 3.7% since Aug 11 to RM8.33. The 52-week high level was RM9.01 per share.

Public Bank Bhd, which hit its year-to-date low on Aug 19 after a downtrend since March, has since recovered by 4.86% to RM4.10. The 52-week high level was RM4.97 per share.

On the other hand, CIMB Group Holding Bhd closed marginally near its 52-week high of RM4.88 yesterday, after breaching the level. In the past two weeks, the stock was up 6.11% to RM4.86 as of closing yesterday.

Kenanga Research banking analyst Clement Chua said the renewed interest in banking stocks could likely be due to developments revolving around the United States Federal Reserve, which may begin tapering its monetary stimulus soon.

Foreign funds could be repositioning themselves ahead of the tapering and the Asian markets, including Malaysia, could likely benefit from the portfolio flows.

Commenting on the banking sector’s expected second-quarter results, Chua anticipates a quarter-on-quarter weakening.

Given the country’s stricter movement restrictions over the past several months, he said banking activities have been affected. “In the previous months, when the business sector loan growth was weak or declined, household loans have been supporting the industry.

“But in May and June, we saw an easing in household loans. This would have an impact on the banking sector earnings.

“The earnings weakness may flow into the third quarter. I think we will see an improvement in the fourth quarter and onwards,” he said.

It is worth noting that outstanding household loan growth moderated to 5.2% in June as compared to 6.1% in May and 6.2% in April.

This was due to the decline in loan disbursements, mainly for the purchase of passenger cars, residential property and credit cards.

However, outstanding business loan growth increased to 0.9% in June, reflecting stronger working capital loan growth. In comparison, business loans grew 0.4% in April and May.

Chua added that the loan moratorium effective in July would also have an impact on the banking sector’s modification losses, although not as large as seen during the first moratorium last year.

Modification loss is an accounting treatment in line with MFRS 9 to factor in the time value of money due to the difference between the present value (PV) of the modified cash flows and the PV of cash flows when the fixed-rate loans and financing were contracted.

Fitch Ratings, in a reply to StarBiz, cautioned that there was more loan impairment to come for the Malaysian banks, given the severity of the economic shock posed by the Covid-19 pandemic.

“However, because of the second six-month debt moratorium introduced in July, we believe that the full scale of non-performing loans (NPLs) will only manifest in banks’ results in 2022.

“Reported NPLs may stay low in 2021 as problematic retail and MSME loans on the moratorium will only fall due in early-2022.

“This buys borrowers time for the economy to return to a stronger footing and to benefit from fiscal transfers and pension withdrawals that were announced by the government.

“Consequently, we think that Malaysian banks’ peak NPL ratios and the decline in their profitability are likely to be less severe than before these measures were introduced,” it said.

Fitch Ratings expects banks to continue setting aside higher-than-normal credit provisions to account for the elevated economic uncertainty.

This means credit costs will remain high in 2021 and 2022, albeit lower than 2020’s levels. The ratings agency pointed out that the higher credit costs would hamstring the recovery in profitability in 2021.

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