Banking sector to wrap 2021 with stronger financial performance

It will be driven by positive sentiments among businesses and consumers following the reopening of the economy 

By ASILA JALIL / graphic by DAYANG NORAZHAR

THE banking sector expected to close the year with stronger financial performance driven by positive sentiments among businesses and consumers following the reopening of the economy. 

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the reopening of the economy will certainly be the main contributor in improving the performance of the sector. 

“When the economy starts to reopen, businesses are able to record their sales and along the way, there will be more opportunity for employment. 

“By extension, sentiments among the businesses and consumers are likely to be positive, leading to better spending patterns. For now, banks should be able to close the year with a decent set of results,” he told The Malaysian Reserve yesterday. 

For the month of October, total loans accelerated further to 3.3% from 2.9% year-on-year (YoY) in September. Household and businesses segments recorded growth of 3.7% and 2.9%, respectively. 

According to a report by Hong Leong Investment Bank Bhd (HLIB), the household segment was buoyed by stronger home, auto and credit card loans, while the business segment working capital financing supported its growth. 

Overall, system loans growth was within the firm’s full-year expectation for financial year 2021 (FY21) of between 3% and 3.5%. 

The firm’s analyst Chan Jit Hoong noted that loan applications were up by 4.2% YoY from -7.3% in September, given stronger household credit appetite which rose 11.3% in October from -11.5% the month before. 

Loan applications for the business segment, however, stayed slugging at -8.1% versus 0.5% in September. 

“Similarly, loan approval was up 2.2% (September: -6.3%); this was led by households (narrowed to -5.1% versus -20.6% in September) while business has slowed again (13.9% versus September: +15.1%). 

“Deposits growth tapered to 4.4% YoY (September: +4.7%) due to the moderation in current account saving account expansion (+9.4% versus September: +11.3%),” he said in the note. 

He added that asset quality held steady as gross impaired loans (GIL) ratio fell five basis points (bps) month-on-month to 1.52% aided by household and business segments given their respective decline of 6bps and 4bps, respectively. 

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

“Also, the government and Bank Negara Malaysia will stay supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio,” added Chan. 

The firm retained its ‘Overweight’ call for the sector as its risk-reward profile continues to skew favourably to the upside as most negatives have been considered by the market. 

Chan said woes surrounding Covid-19 are likely to fizzle out next year which will lead to improvements in the economy and banking sector. 

The firm gave a ‘Buy’ rating to Malayan Banking Bhd with a target price (TP) of RM9.40, Public Bank Bhd (TP: RM4.50), RHB Bank Bhd (TP: RM7.00), Alliance Bank Malaysia Bhd (TP: RM3.30), Bank Islam (TP: RM3.45) and Affin Bank Bhd (TP: RM2.25). 

Meanwhile, Mohd Afzanizam said the emergence of the Omicron variant indicates that the downside risks to the economy and sectors are still visible. 

“Following this, banks have remained vigilant in their credit risks assessment and this is reflected in the rise in loan loss coverage ratio which has gone up to 124.3% in October compared to 111.1% in the same period last year,” he added.