Analysts expect banks to outperform the market in 2021 as the economy recovers and the availability of Covid-19 vaccines beginning in 2H21
by ASILA JALIL / pic by AFP
THE ‘Overweight’ call on the banking stocks remains despite stock prices of banks like Malayan Banking Bhd (Maybank), Alliance Bank Malaysia Bhd, Public Bank Bhd and Hong Leong Bank Bhd are at year-highs but analysts warn prices may have run slightly ahead of fundamentals as uncertainty still looms in regards to asset quality.
MIDF Amanah Investment Bank Bhd (MIDF Research) head of research Imran Yassin Mohd Yusof told The Malaysian Reserve (TMR) interest in banking stocks lately is generally due to the expectation of a recovery in economic activities next year with economists expecting the Malaysian economy forecast to grow by 5%-6% from a contraction this year.
“The expectation of the economic recovery is made more certain with Covid-19 vaccines starting to become available now,” he said.
Although banks’ asset quality has been stable post the six-month blanket loan moratorium, Imran said there are still short-term headwinds to look out for.
“This is due to the fact that the economy has yet to fully recover from the pandemic,” he said. AmInvestment Bank Bhd expect the sector’s core earnings to recover and grow by 16.1% in 2021 based on higher total income from a pick-up pace of loan growth, stable to slightly improved net interest margins while operating expenses and lower provisions remain under control.
This is after an expected sharp 22.2% contraction in 2020 earnings due to higher provisions which have been conservatively booked as management overlay, lower margins due to the Overnight Policy Rate (OPR) cuts and from changes to macroeconomic variables, it noted in a report on Wednesday.
The share price of Maybank has risen from RM7.18 on Nov 6 to RM8.70 yesterday, while Public Bank has gone from RM15.22 to RM21.50 over the same period and Hong Leong Bank from RM14.70 to RM18.70 as the news of rollout of vaccines hit the front pages.
“We expect banks to outperform the market in 2021 as the economy recovers and general availability of Covid-19 vaccines beginning the second half of 2021 (2H21). We forecast sector PATAMI to rebound 27% in 2021 (2020: -30%). A sporadic resurgence in cases and lockdowns are the downside risks but the eventual recovery is still very much the focus,” RHB Investment Bank Bhd stated in a report yesterday.
From a local perspective, on Nov 24, the government through the Health Ministry signed a preliminary purchasing agreement with pharmaceutical company Pfizer Inc to obtain 12.8 million doses of Covid-19 vaccines to meet the immunisation needs of 20% or 6.4 million Malaysians.
Prime Minister Tan Sri Muhyiddin Yassin then announced plans to increase vaccine purchase up to 70% of the population.
Besides the news on vaccine rollout, the prospects of the opening of borders by some countries in the region also point to more lively eco- nomic activities next year said Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid.
He, however, opined the downside risks to the outlook remain “highly visible” and therefore the possibility for the OPR to reduce further remains on the table should the vaccine roll-out face issues.
“The anticipation of higher loans or financing impairment next year could also result in higher loan or financing loss provision which will affect the banks’ earnings.
“But for now, the news on vaccine rollout appears to be quite convincing and this would allow the reopening of the economy to be more widespread,” he told TMR.
RHB Investment added that its ‘Overweight’ call is anchored on a vaccine-induced valuation multiple rerating rather than earnings/ return on equity recovery (fundamentals) which could take years, due to the time lag between the approval and wide deployment of vaccines.
The jump in Maybank’s share price has taken its market capitalisation to RM97.8 billion, reinforcing its position as the most valuable company on the exchange with Public Bank second with a valuation of RM83.5 billion.
Maybank’s market capitalisation rose by RM18 billion in the past three months.
Public Bank, which has been partly helped by its bonus issue, has seen its market capitalisation increased by RM23 billion in the past three months. RHB Investment has downgraded its call to ‘Neutral’ on the bank with a target price of RM21.60.
Hong Leong Bank’s market capitalisation rose by RM8 billion over the same period bringing the value of the company to RM39 billion yesterday.
Alliance Bank’s share price is trading 33% or 75 sen higher compared to three months ago to close at RM2.96 yesterday, valuing the company at RM4.6 billion. Its value has increased by RM1.16 billion from RM3.47 billion on Oct 16.