Eyes remain on bank provisions despite rebound in loans growth

The low loan repayments had caused loan stock to remain high which led to the loans growth

by ASILA JALIL/ graphic by DAYANG NORAZHAR

THE growth in loans in June might be able to improve bank earnings, but concerns remain of a rise in bank provisions after the loan moratorium ends in September.

MIDF Research head Imran Yassin Md Yusof said the rise in loans for the month of June was partly due to the minimum loan repayments which only grew 0.9% year-on-year (YoY) to RM92.9 billion compared to 7.3% growth in February this year, which was before the loan moratorium was in place.

The low loan repayments had caused loan stock to remain high which led to the loans growth.

“In terms of banking earnings, this may provide some cushion, but our concern is how provisions might be elevated when the loan moratorium ends,” he told The Malaysian Reserve recently.

System loan growth picked up by 4.1% YoY in June versus 3.9% in May following the easing of the Movement Control Order with household loans increasing 3.5% YoY against 3.2% in June.

For the household sector, the rise came from mortgages which saw an increase of 6.9% and personal financing (4.4%).

“This does reflect some green shoots in the economic recovery.

However, we are wary of its pace and potential bumps given the high unemployment and weakness externally,” he said adding that the current uptick could be due to pent-up demand after the reopening of the economy.

He also opined investors should look into banking counters with stable borrowers profile as it will minimise the impact on its asset quality after the loan moratorium ends.

Bank Islam Malaysia Bhd remains the firm’s top pick with a target price (TP) of RM4.25.

In a research note recently, Hong Leong Investment Bank Research maintained its ‘Neutral’ call on the banking sector as it believes it is too early to claim the pain points from the Covid-19 pandemic have gone.

Its analyst Chan Jit Hoong said the sector may have to contend with the risk of delayed deterioration in asset quality and the emergence of a second wave infection.

He noted asset quality for the sector improved as gross impaired loans (GIL) ratio ticked down nine basis points month-on-month to 1.46% and the sector’s GIL ratio remains at low levels for the rest of the year due to loan moratorium extension and targeted assistance that banks will provide to its customers.

“However, it may hide actual damage and cause a lag in non-performing loan formation if the situation does not improve rapidly or advent of Covid-19 second wave paralyses the country again,” he said.

The firm gives a ‘Buy’ rating on RHB Bank Bhd with a TP of RM5.80 due to its appealing risk-reward profile and strong CET1 ratio of 16.6%, while it has ‘Sell’ ratings on Public Bank Bhd with a TP of RM14.80 and Affin Bank Bhd with TP of RM1.55 for rich valuations and lacking economies of scale to compete respectively.

Kenanga Research also maintained its ‘Neutral’ call for the sector as it is of the view that bank earnings remain uncertain and volatile ahead while recovery is “unlikely to be a clear cut”.

“Early signs from the banking statistics suggest that pre-emptive loan provisioning may see an acceleration in the second quarter. In mitigation, the reopening of the economy and significant cuts to policy rate have helped clear some overhang for the sector,” said its analyst David Chong in a note recently.

The firm likes Hong Leong Bank Bhd with a TP of RM17 as a defensive, high-quality bank with a strong digital infrastructure that is expected to benefit after Covid-19.

It also said AMMB Holdings Bhd’s valuations appear undemanding and think the stock could be “an attractive catch-up play” and gives the bank TP of RM3.60.