Banking sector sees better days ahead

by HARIZAH KAMEL / pic by BLOOMBERG

THE banking sector risk-reward profile continues to skew favourably to the upside as most negatives have been considered by the market.

Hong Leong Investment Bank Bhd (HLIB) analyst Chan Jit Hoong said Covid-19 woes will likely fizzle out in 2022 while the state of the economy and banking sector will only get better with time.

“Furthermore, valuations are undemanding and there is ample liquidity in the market,” he said in a research report yesterday.

For large-sized banks, Chan likes Malayan Bank Bhd (Maybank) with a target price (TP) of RM9.40 for its strong dividend yield and Public Bank Bhd (TP: RM4.50) for its defensive qualities, over CIMB Group Holdings Bhd (TP: RM 5.10).

On mid-sized banks, RHB Bank Bhd (TP: RM6.85) is favoured more than AMMB Holdings Bhd (TP: RM3) as the former has a higher common equity Tier 1 ratio and larger fair value through other comprehensive income reserves to buffer against potential yield curve volatility.

Among small-sized banks, BIMB Holdings Bhd (TP: RM4.80) and Affin Bank Bhd (TP: RM2.15) are preferred over Alliance Bank Malaysia Bhd (TP: RM2. 80).

HLIB likes the former, given its positive long-term structural growth drivers and better asset quality while the latter has value unlocking potential. Chan retained the sector’s ‘Overweight’ call and ‘Buy’ on Maybank, Public Bank, RHB, BIMB and Affin Bank.

For second quarter of 2021 (2Q21), Maybank’s net profit jumped 108% to RM1.96 billion but revenue declined 3.9% to RM11.34 billion against RM11.79 billion in 2Q20.

Public Bank posted a 37.99% increase for its net profit at RM1.38 billion and higher revenue at RM4.92 billion versus the previous year’s RM4.74 billion.

RHB’s earnings grew to RM701.34 million from RM400.77 million a year ago while revenue dropped 10.2% to RM2.93 billion from RM3.25 billion a year earlier.

Earnings for BIMB and Affin Bank rose 21% to RM184.6 million and 75% to RM117.95 million respectively.

Quarter revenue was up 9.6% to RM1.25 billion for BIMB and 25.18% higher at RM578.9 million for Affin Bank.

According to Chan, loan growth continued to soften in July 2021 to 3.1% year-on-year (YoY) given the weaker household (HH) segment as a slowdown was sighted across the board.

Business lending growth ticked up a little to 1.3% thanks to better working capital loans and is overall within HLIB’s full-year financial year 2021 (FY21) loans growth expectation of between 3% and 3.5%.

Loan applications fell by 28.4% YoY as credit demand for both HH (-37.7%) and business (-13.1%) were weak.

Furthermore, loan approval slowed down as well to -16.2% against -0.1% in June, no thanks to HH but business provided some respite (11.4%).

Deposit growth held steady at 4% Y oY despite CASA (current account and savings account) slowing down to 12.9% from 14% in June as foreign currency deposits (22.1%) covered up the slack.

July’s loan-to-deposit ratio remained fairly flattish month-on-month (MoM) at 87%, near to February 2018’s peak of 89%, to which Chan said there is brewing deposit competition in the market.

Asset quality showed some weakness as gross impaired loans (GIL) ratio nudged up 5 basis points (bps) MoM to 1.67%, dragged mainly by the HH segment (7bps) while business stayed rather unchanged (1bp).

“We expect GIL ratio to continue rising but would not be overly worried as banks have made heavy pre-emptive provisioning in FY20 and we reckon credit risk has been adequately priced in by the market, looking at the elevated net credit cost assumption used for FY21 by both us and consensus.

“The government and Bank Negara Malaysia will remain supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio,” stated Chan.