Malaysia’s banking sector should remain resilient in 2021

DESPITE operating in an unfavourable economic environment, the Malaysian banking system remains resilient, upheld by strong liquidity management and capital adequacy practices.

While near-term prospects appear dim, Kenanga Research expects sentiment to encounter a kneejerk effect when decent economic recovery is posted.

“The rolling out of vaccination efforts would ultimately translate to less restrictive movement controls until we are able to make do without them all together,” reckoned analyst Clement Chua in a banking sector update.

“Additionally, we do not expect further OPR (overnight policy rate) cuts for the year but welcome any hikes as it would enable better pricing opportunities for banks and also boost sentiment.”

On a similar note, Kenanga Research which maintained its “overweight” stance on the banking sector also does not anticipate further provisioning to be worrisome given that most banks have frontloaded their books during 4Q CY2020.

In terms of stock picks, it likes Malayan Banking Bhd (Mnaybank) (“outperform”; target price: RM9.10) for its industry-leading yield (7-8%) and high dividend-to-ROE (return-on-equity) spread among its peers.

“On the note of economic recovery, being the market share leader in domestic loans, Maybank could be poised to experience accelerated loans growth given its brand equity and outreach,” added the research house.

In conjunction with the release of its 2020 Annual Report yesterday, Bank Negara Malaysia (BNM) said Malaysia’s economic growth is likely to be in the lower range of its 6.0% to 7.5% forecast for 2021 should downside risks materialise, mainly relating to ongoing uncertainties surrounding the COVID-19 pandemic as well as commodity shocks which can happen anytime.

Moreover, the central bank also revealed that Malaysia’s household debt-to-gross domestic product (GDP) ratio had risen to a new peak of 93.3% as at December 2020 from the previous record high of 87.5% in June 2020.

Also reiterating its “overweight” outlook on the banking sector, Hong Leong Investment Bank (HLIB) Research opined that the banking system has sufficient buffers to withstand extreme stresses which are more dire versus the historical worst experienced to date.

“We remain optimistic on the sector given: (i) COVID-19 vaccination rollout; (ii) healing economy, and (iii) ample market liquidity, motivating ‘risk on’ appetite into stocks with recovery and deep value traits,” noted analyst Chan Jit Hoong.

For large-sized banks, HLIB Research, too, favours Maybank (target price: RM9.20) over Public Bank Bhd (TP: RM4.25) and CIMB Group Holdings Bhd (TP: RM4.50).

“Public’s valuation is rich, has high foreign shareholding level and low yield while CIMB is a riskier proposition given less solid asset quality,” added the research house. – April 1, 2021

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