Banks’ earnings to recover in 4Q

CMCO impact is likely to be minimal to moderate as it is less restrictive and economic activities are allowed to continue

by ASILA JALIL / pic by BLOOMBERG

THE less restrictive conditions under the Conditional Movement Control Order (CMCO) will enable banks to sustain earnings recovery in the fourth quarter of the year (4Q20).

Although most banks registered a drop in profit for 3Q20, MIDF Research head Imran Yassin Md Yusof said the impacts of the CMCO will be minimal in 4Q.

“We believe banks will continue to register profit in 4Q. We opine the CMCO will have an impact, but it is likely to be minimal to moderate because the CMCO is less restrictive than the MCO and economic activities are allowed to continue,” he told The Malaysian Reserve (TMR) in an email response recently.

The firm expects a “flattish” quarter-on-quarter growth in banks’ earnings per share in the 4Q.

Investors’ appetite for banking stocks appears to have returned to the prospects of higher earrings. The Kuala Lumpur Finance Index has risen 16% for the current quarter, heading for the biggest advance in at least 10 years.

The latest quarterly earnings of Malaysian banks suggest the institutions remain robust, despite having to make provisions, and are recovering from the slump in the previous quarter due to the blanket loan moratorium that ended in September.

Hong Leong Bank

Among the eight local commercial banks in the country, Hong Leong Bank Bhd (HLIB) registered a 5.9% or RM40.33 million increase year-on-year (YoY) in earnings to RM728.9 million in its 1Q of financial year 2021 (1QFY21) ended Sept 30, 2020.

The increase was mainly driven by double-digit top line growth, prudent cost control and robust contributions from associates.

Its revenue for the quarter also rose to RM1.35 billion compared to RM1.22 billion in the same period last year. The lender’s loans grew by 6.8% YoY to RM148.1 billion.

In a research note, Maybank Investment Bank Research (Maybank IB Research) said HLIB has extended its payment relief assistance plan (PRAP) to 44,000 customers with loans amounting to RM11.8 billion.

“This represents 8% of total gross loans and 4.2% of its client base. Retail customers’ loans under PRAP amounted to RM9.2 billion, while small and medium enterprise and corporate clients accounted for RM2.6 billion,” it said.

Public Bank

After recording a 24.48% YoY decline in earnings in 2Q, Malaysia’s second-largest bank by market capitalisation, Public Bank Bhd, registered a 2.2% or RM30.18 million increase in its net profit in the 3Q20 ended Sept 30, 2020, to RM1.39 billion from RM1.36 billion in the corresponding quarter last year.

This growth was underpinned by higher incomes from investment, stock-broking, fund management, Islamic banking and net interest.

Public Bank’s investment income came in at RM102.9 million, while its net fee and commission income stood at RM89.1 million on higher income from stock-broking and fund management.

Its Islamic banking income stood at RM63.6 million, net interest income was RM48 million and other operating income at RM25.2 million in the quarter under review.

The bank said these were partially offset by higher loan impairment allowance of RM285.4 million for “the potential effect” of Covid-19 pandemic.

In 2Q, the group had suffered modification loss amounting to RM498 million due to loan moratorium offered to borrowers.

Maybank IB Research said despite the strong quarter for the bank, cautiousness still prevails as the bank has raised its credit cost in 4Q20 due to concerns over the CMCO.

“With just one more quarter to go, management’s guidance for FY20 has been tweaked. It now anticipates loan growth of above 4% (previously 3%-4%), net interest margin compression of 20 basis points (bps) including modification loss (unchanged), and credit cost of 30bps – 35bps (20bps – 25bps previously).

“Credit cost averaged 22bps in the first nine months of 2020, which implies that 4Q20 has to come in at, at least 53bps, to average 30bps in FY20,” it said.

RHB’s Khairussaleh says the bank ‘remains vigilant’ while continuing to navigate through the impacts of the pandemic (pic by ARIF KARTONO/TMR)

RHB Bank

Another bank that made profit was RHB Bank Bhd which saw its net profit rose 1% or RM6.42 million in 3Q20 to RM622.25 million against RM615.83 million a year ago, due to higher allowances for credit losses and impairments.

The group’s revenue slid 9.8% YoY to RM3.01 billion from RM3.34 billion.

Group MD Datuk Khairussaleh Ramli said in a statement last Monday that the bank “remains vigilant”, while continuing to navigate through the impacts of the pandemic and support its provisions to weather the uncertainties ahead.

Resilient Sector

Meanwhile, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid told TMR that the banking sector had been resilient throughout the year due to robust enforcement by Bank Negara Malaysia (BNM).

He noted that the main risks engulfing the sector have been the potential deterioration in asset quality.

The banking sector has been resilient throughout the year due to robust enforcement by BNM, says Mohd Afzanizam. (TMRpic)

“In this respect, BNM has projected the impairment ratio would go from an estimated 3.1% by the end of this year to 4.1% by the end of 2021.

“Consequently, banks have not rested on their laurels and are constantly on the lookout for the possible pitfalls, especially in regards to the asset quality and the level of liquidity and capitalisation,” he said.

In a recent report, Fitch Ratings Inc said ongoing public health challenges and political uncertainty in the country will keep consumer and business sentiments fragile, leading to continued fiscal support and extended regulatory relief.

The extended loan moratorium assistance for targeted groups and the RM10,000 withdrawal from the Employees Provident Fund’s Account 1 approved by the government last week will help banks avoid “sharply high non-performing loans (NPLs)” and credit provisions, and coil result in a shallower decline in profitability and capitalisation.

“However, extended relief schemes also mean that visibility on some borrowers’ cashflows and viability will remain clouded into late-2021, resulting in slower NPL recognition and necessitating higher credit provisions than normal.

“This lengthens the resolution and recovery period, and we do not expect a meaningful rebound in loan growth or risk-adjusted earnings in 2021. The resumption of loan repayments is also likely to make faster growth in net balances harder to achieve.”