THE banking sector is facing headwinds, with the loan moratorium carrying a higher risk of defaults, say analysts.
“In our view, the banks’ balance sheet and liquidity will be subject to more stress in 2020 and 2021, due to the moratorium period offered to borrowers as well as the higher risk of defaults as economic circumstances remain uncertain,” said Affin Hwang Capital analyst Tan Ei Leen.
AmInvestment Bank analyst Kelvin Ong shares the same concerns about loan impairment post-moratorium, but also expressed that bank interest margins will be impacted by the overnight policy rate (OPR) cut on May 5.
“May 2020 saw the sector’s weighted base rate and average lending rate slipped by 50bps and 33bps to 2.68% and 4.34% respectively, after the central bank announced a further reduction to the OPR by 50bps on May 5,” said Ong.
Ong noted that the moratorium on loan repayments will result in a one-off Day 1 modification loss to bank interest income in 2Q20 as well.
“However, we believe that the impact will be manageable with the loss adjustment eventually unwinding. The concessionary funding for loans to assist SMEs impacted by Covid-19 allows a healthy spread to be earned by banks,” added Ong, adding that this is envisaged to be able to partly mitigate the Day 1 modification loss.
Tan added that banking system loans were also affected by the shift in demand for more credit by manufacturing, transportation/storage, energy/utility, and wholesale/retail sectors, which need additional loans to sustain under challenging conditions or to cope with an unexpected surge in demand during the Covid-19 pandemic.
TA Securities analyst Li Hsia Wong also expects more caution moving forward, with the forecast that loan growth will remain tepid due to the movement control order (MCO). However, loan growth assumption is maintained at 2.5% for 2020, underpinned by the increase in consumer and business loans.
MIDF Research analyst Imran Yassin Yusof, however, noted a pleasant surprise in the improvement of asset quality.
“We speculate that this could be due to previous restructured and rescheduled loans turned performing,” said Imran.
At the same time, Imran also advises caution, as the various forms in which the MCO has impacted the economy have yet to fully manifest, adding that this will have an impact on loans growth and asset quality.
“We foresee that it will take some time for the situation to return to normal. However, we do not foresee exacerbated stress to the banking sector as it faces the current headwinds from a position of strength,” said Imran.
Affin Hwang Capital and TA Securities both maintained an underweight call on the banking sector, while AmInvestment Bank and MIDF Research maintained neutral calls.
Affin Hwang Capital prefers Aeon Credit Service (M) Bhd with a buy call and a target price of RM12.30, believing there is a value proposition as it looks at a recovery year in FY22.
TA Securities, on the other hand, maintained sell calls on Public Bank Bhd, Alliance Bank Malaysia Bhd, RHB Bank Bhd, AMMB Holdings Bhd, Malaysan Banking Bhd, Hong Leong Bank Bhd, CIMB Group Holdings Bhd, and Affin Bank Bhd.
AmInvestment Bank maintained buy calls on Maybank, RHB Bank, and Hong Leong Bank, with fair values of RM8.70, RM6.20, and RM15.60 respectively. It also upgraded CIMB to a hold with a fair value of RM3.40.
MIDF Research has Maybank as a top pick, with a buy call and a target price of RM8.20, citing its solid fundamentals, scale, and size, as well as how it is a systemically important bank, which will ensure support should there be any stress to asset quality. BIMB Holdings Bhd is also favoured with a buy call and a target price of RM4.25, due to its asset quality. – July 1, 2020