POSITIVE vibes from yesterday’s high vaccine efficacy by Pfizer and BioNTech could prompt financial markets to start pricing in a faster-than-expected recovery in cyclical sectors – something which augurs well for bank stocks whose prices have remained subdued for most part of this year (until yesterday).
UOB Kay Hian Research expects the market to start looking beyond the next two to three quarters of rising pre-emptive provisions.
Similarly, there could be some profit-taking activities from the initial sector knee-jerk buying on the back of positive vaccine news flow when banks begin to announce rising provisions in their 3Q FY2020 results.
“However, from the middle to end-1Q FY2021, the sector could see more sustained buying interest on the back of potential positive final dividend surprises and mass rollout of COVID-19 vaccine,” wrote Keith Wee Teck Keong in a sector update.
“That said, we opine sector outperformance could remain uneven on the back of rising non-performing loan into 1Q FY2021 and 2H FY2021 as normalisation in interest rates could induce some form of profit taking on the broader market similar to the ‘taper tantrums’ in 2013.”
All-in, UOB Kay Hian Research upgraded the banking sector to “overweight” on the following catalysts:
- As the overnight policy rate cut may have bottomed out, net interest margin could stage a recovery in 2021 as deposits continue to be re-priced downwards;
- As banks are still expected to remain profitable based on Bank Negara Malaysia’s stress test, they could resume dividend payments in their 4Q FY2020 results due in February 2021.
- The sector’s net profit is expected to grow 13% year-on-year (yoy) in FY2021 from a low FY2020 base (-22% yoy) as net credit cost is expected to taper off to 57 basis points (bp) (2020: 69bp) but remains relatively elevated versus pre-COVID-19 run rates of 25bp.
“We believe FY2021 could be a story of two halves with 1H FY2021F return-on-equity coming in much lower than in 2H FY2021 as banks will continue to incur pre-emptive provisions in 2H FY2021,” noted the research house.
Given the still-uncertain asset quality and hence provision outlook, UOB Kay Hian Research urged investors to acquire safer asset quality banks on price weakness.
In this regard, the research house has upgraded Hong Leong Bank Bhd and Public Bank Bhd to “buy” with higher target prices of RM17.08 and RM18.65 respectively as it lowers its discount rates to factor in scarcity premium for them being defensive. – Nov 11, 2020
