Provisions drag banks’ earnings in 4Q20

by ASILA JALIL / pic by TMR

THE banking sector’s overall earnings for the financial year 2020 (FY20) shrank by 20.8% year-on- year (YoY) as banks continued to proactively set aside provisions for potential credit losses.

AmInvestment Bank Bhd analyst Kelvin Ong in a recent note said despite a marginally higher total income in the fourth quarter of 2020 (4Q20), banks’ move to raise their loan loss provisions had resulted in weaker earnings.

“This was despite a marginally higher total income, supported by stronger non-interest income (NOII) which offset a weaker net interest income (NII) from interest-rate cuts.

“The results of banks were a mixed bag with operating expenditures (opex) tightly controlled. The earnings of Malayan Banking Bhd (Maybank), RHB Bank Bhd, Hong Leong Bank Bhd and Alliance Bank Malaysia Bhd meet our expectations.

“CIMB Group Holdings Bhd’s core earnings were below our forecast largely due to higher than expected allowances for credit losses,” he said.

CIMB also reported higher provisions on debt securities and derivatives exposure which the latter was related to the aviation industry.

Public Bank Bhd’s core cumulative earnings beat the research firm’s estimate as it registered better than expected NOII and NII, while Bank Islam Malaysia Bhd’s earnings were above its projection on higher financing income and lower opex.

On AMMB Holdings Bhd, the group’s underlying earnings were above consensus expectation, Ong said.

Although most banks had a slower pace of loan growth in 4Q20 with an increase of 3.4% YoY, the industry’s loan growth is expected to be moderately higher between 4% and 5% this year.

Based on stocks under the research firm’s coverage, gross impaired loan ratio for the sector rose 1.87% in 4Q20 from 1.83% in 3Q20 after the end of the automatic moratorium.

Credit cost for the sector climbed to 0.96% in 4Q20, against 0.82% in 3Q20 as banks continued to be conservative, topping up further provisions. For 2020, credit cost surged to 0.81% versus 0.26% in 2019.

The sector’s net interest margin (NIM) rose 11 basis points quarter-on-quarter to 2.2% in 4Q20 supported by a reprise of liabilities and better deposit mix which reduced funding cost.

“We expect stable to modestly higher interest margins for banks in 2021 with no further rate cuts. We maintain our Overnight Policy Rate projection for 2021 of 1.75%,” Ong said.

The firm revised the sector’s calendarised core earnings growth for this year to 23.5% from 16.1%, largely after adjusting its assumptions for NIM higher and fine-tuning its credit cost estimates.

“The vaccination programme, which is on track, recently boosted swap rates and Malaysian Government Securities yields, a reflection that the market is not pricing in further rate cuts.

“Coupled with the prudent front loading of provisions, these are seen as positive for banks’ earnings ahead.

“Also, we expect sentiment on banks to improve after the resumption of dividends with better visibility on earnings and asset quality post-automatic moratorium,” he said.

The firm maintained its ‘Overweight’ recommendation on the sector with Hong Leong Bank as its top ‘Buy’ with a fair value of RM20.30 per share, RHB Bank (RM6.80 per share), Maybank (RM9.80 per share) and CIMB (RM5.50 per share).

It favours larger systematic banks such as Maybank and CIMB to ride on the economic recovery this year and banks with undemanding valuations trading at attractive price-to-book value such as RHB Bank.

“Also, we like Hong Leong Bank with a strong top-line growth, robust profit contribution from associates and resilient asset quality,” Ong said.

Read our previous report here

Loan loss provisions taper banks’ earnings in 2020