Analysts project bank earnings should be better QoQ due to the absence of modification loss, but to decline YoY on elevated preemptive provisioning

by RAHIMI YUNUS / graphic by DAYANG NORAZHAR

BANKS are expected to report improved earnings in the third quarter (3Q) against the preceding quarter as a result of lower provisions.

The major banks have yet to post their 3Q numbers, but investors have started to channel money into the financial sector on expectation earnings are set to rise on pickup in economic activity.

MIDF Research head of research Imran Yassin Mohd Yusof said banks are forecasted to register between 25% and 30% quarter-on-quarter (QoQ) earnings improve ment in the 3Q.

He, however, cautioned the financial performance of local banks will continue to be weaker when compared on a year-on-year (YoY) basis as provisions will likely remain elevated.

MIDF projected bank earnings will contract by 20% on a YoY basis for the 3Q.

“We believe on a sequential-quarter basis, we are looking at a better quarter in 3Q calendar year 2020 due to the fact we expect provisions may be lower on a QoQ basis, and there could be an improvement in terms of net interest margins (NIMs) as there could be repricing in deposits following the Overnight Policy Rate cuts.

“We also saw robust loan growth in 3Q due to Penjana stimulus, among others. This will give some support to net interest income,” Imran Yassin told The Malaysian Reserve (TMR).

He said the retail sector will be able to support growth at the current juncture given the short-term Economic Recovery Plan (Penjana) stimulus, besides those that have benefitted from the Covid-19 such as the glove and IT sectors.

However, he added that the hospitality and tourism sectors could drag bank earnings.

Hong Leong Investment Bank Bhd analyst Chan Jit Hoong voiced similar expectations, saying bank earnings should be better QoQ due to the absence of modification loss, but to decline YoY on elevated preemptive provisioning.

In the 4Q, Chan said banks should start seeing NIM recovery as downward deposits repricing takes place.

“Loans growth is seen to remain tepid. However, the gross impaired loan (GIL) ratio is expected to stay at low levels as troubled borrowers can obtain targeted assistance from banks. Regardless, they will continue to keep bad loan provisioning at an elevated level,” Chan told TMR.

CGS-CIMB Research analyst Winson Ng said collateral coverage for banks under its coverage is strong at an average of 79.3% in the financial year 2021 (FY21) to FY22 forecast (FY22F), while banks’ provision buffer can cover up to 80.5% of a rise in GIL from the end-June 2020 levels.

“Banks’ robust coverage gives us comfort to retain our ‘Overweight’ rating on banks despite the expected rise in GIL in 2021F. A potential rerating catalyst for banks is the projected rebound in net profit growth to 14.8% in 2021F.

“Potential downside risks would be higher than expected 2021F GIL and provision,” Ng said in a sector note on Wednesday.

He said the research expects the banking industry’s GIL ratio to rise from 1.38% at end-September 2020 to 1.7% at end-December 2020 and 2% at end-December 2021.

Despite the higher projected GIL ratio, he said the research still expects banks’ loan loss provisioning to drop in 2021F (versus 2020F) as banks have front-loaded most of their loan loss provisioning in 2020F.

Banks’ proactive moves to ramp up preemptive provisioning have pushed up the industry’s loan loss coverage from 80.9% at end-December 2019 to 105.2% at end-September 2020 — an all-time high.

Based on the research’s scoring methodology on credit risks, he said Public Bank Bhd and Hong Leong Bank Bhd scored the highest points at 37 to 38 out of 40 maximum points, versus 10 to 24 points for the other banks.

He said this indicates Public Bank and Hong Leong are potentially the most defensive against any increase in the industry’s GIL in 2021F arising from the Covid-19 outbreak.

Among the indicators used by CGS-CIMB Research are the peak GIL ratio in the past 20 years, collateral coverage, loan loss coverage, total buffer coverage and percentage loan exposure to residential mortgages.