Banks remain resilient despite facing headwind


THE Malaysian banking sector remains strong despite concerns on asset quality post-loan moratorium period and the lack of visibility, said sector analysts.

“We believe there could be a case of a re-rating for the sector should there be more visibility on the overall asset quality going forward.

“The recently implemented Conditional Movement Control Order in Selangor, Putrajaya and Kuala Lumpur, we believe, will have limited impact on banks given the limited impact to overall GDP this year,” MIDF Amanah Investment Bank Bhd (MIDF Research) analyst Imran Yassin Md Yusof stated in a research note yesterday, following an analyst briefing with Bank Negara Malaysia on Wednesday.

MIDF Research anticipates the financial performance of Malaysian non-financial corporates to deteriorate in the first half of 2020 (1H20) due to the business disruptions and weak demand from widespread global lockdowns to contain the spread of Covid-19.

The impact is more pronounced on small and medium enterprises (SMEs) as surveys revealed many smaller firms have limited financial buffers with cash reserves of only two months or less for expenses. The lower level of digitalisation among SMEs is also a constraint.

Recovery on loan repayment post-moratorium has reached 70% of pre-moratorium levels. Pockets of risk remain for the sector as some service industries remain under strict constraints such as the tourism sector.

“With the automatic loan moratorium in place, the total banking system impairments and delinquencies have remained low, but are expected to increase in the period ahead,” MIDF Research forecast.

AmInvestment Bank Bhd analyst Kelvin Ong said despite the weaker earnings of banks in 1H20, weighed down by margin compression from the consecutive Overnight Policy Rate cuts and higher provisions for credit losses, banks maintained healthy capital and liquidity positions.

“Annualised credit cost rose to 56 basis points (bps) compared to an average of 20bps for 2010-2019. Liquidity coverage ratio was sustained at 149% in June 2020, while excess capital buffers of RM121.6 billion remained strong to withstand potential credit losses,” he said.

Ong said the gross impaired loan ratio for the sector was at a low 1.5% due to most retail and SME loans placed under the automatic blanket loan moratorium for six months.

Debt recovery efforts by banks have reduced the outstanding loan impairments for the sector.

For now, both MIDF Research and AmInvestment Bank maintain a ‘Neutral’ call on the banking sector.

MIDF Research’s top pick is BIMB Holdings Bhd with a target price of RM4.25 due to its asset quality which is expected to be stable on account of its borrower’s profile.

AmInvestment Bank’s top picks are Malayan Banking Bhd with a fair value (FV) of RM8.40 per share, RHB Bank Bhd (RM5.70 per share) and Hong Leong Bank Bhd with an FV of RM16.80 per share.