KUALA LUMPUR (July 1): The liquidity coverage ratio (LCR) of Malaysian banks is expected to decline further this year, according to AffinHwang Capital Research.
In a note on the banking sector, analyst Tan Ei Leen said the banking system continues to operate at a comfortable LCR of 140% and loan-to-fund ratio of 82.3% in May, versus April this year.

That said, the banking sector’s LCR and net-stable-funding-ratio (NSFR) is expected to continue to decline in the next six months in light of liquidity needs of banks during the six-month moratorium period.

“To recap, BNM has given banking institutions some leeway in LCR (can operate below 100%) and [NSFR] requirement, which was lowered to 80% (and to revert to 100% from 30 Sept 2021),” explained Tan.

In the case of commercial banks, the average lending rate slipped by 25 basis points (bps) to 4.01% in April 2020, while the base rate declined by 50bps to 2.68% subsequent to another 50bps rate cut in May.

For 2020, Tan predicted that the net interest margin (NIM) of the banking sector will decline to 1.95%, from 2.1% in 2019. However, it is expected to recover to 2% in 2021.

A 1.3% month-on-month (m-o-m) decline was seen in May for system outstanding impaired loans, following declines in transportation, communication and storage sector impaired loans. However, on a year to date (YTD) basis, they were up 3.6%.

System gross impaired loan (GIL) ratio was at 1.55% in May, from 1.58% in April. Despite the slight dip, the research house observed that it saw some stress in lending for certain sectors, such as financing activities (including lines to securities firms, money-lenders and non-bank lenders) as well as manufacturing sectors.

“In the coming months, we expect a rise in impaired loans, in particular sectors such as construction, retail/wholesale/hotels and the household sectors. Meanwhile, the working capital, residential property, construction and commercial property segments make up the bulk of impaired loans in the system,” she said.

Tan maintained their underweight call on the banking sector, noting that banks are expected to see a 28.6% year-on-year (y-o-y) decline in core net profit for 2020, before recovering by 13% y-o-y in 2021.

“In our view, the banks’ balance sheet and liquidity will be subject to more stress in 2020-21E due to the moratorium period offered to borrowers, as well as a higher risk of defaults as economic circumstances, remain uncertain. That said, we still take comfort in the strong capitalisation levels (CET1 [common equity tier 1] ratio at 14% as at May 20 and total capital ratio at 17.7% as at May 20) while the capital buffer (in excess of regulatory requirement) of RM121 billion as at Feb 20, remains fairly robust.

“Based on our assumptions for the banking sector for 2020E, we are expecting: i) system loans to decline 1% y-o-y; ii) NIM of 1.95% (with four rate cuts in 2020); iii) net credit cost at 56bps; and iv) CIR at 48%,” it noted.

The research house named Aeon Credit Service (M) Bhd is the top pick among banking stocks, with a “Buy” call and RM12.30 target price.

"We believe that there is a value proposition in Aeon Credit as we look to a recovery year in FY22E, with receivables growth of 9% y-o-y (vs. -4% y-o-y in FY21E) and a lower net credit cost of 334bps (vs. 353bps in FY21E).

"Aeon Credit remains a key player in consumer financing through credit cards, personal financing, motorcycle financing and used-car financing. Its 'valuechain transformation project' comprises: i) online loan applications/approvals; ii) a B2C2B digital marketing strategy; iii) the use of AI in its credit assessment model; and iv) process automation to help boost top-line growth and enhance operating efficiency.

The lender's high return on equity at 14.4% in FY22E is backed by its use of leverage and ability to generate an effective interest rate of 16-17%, which is higher than the 5% of traditional banking players, said Tan.