KUALA LUMPUR (Aug 2): Analysts remained upbeat on banks despite the sector’s loans growth moderating and asset quality weakening in June.

UOB KayHian’s analyst Keith Wee said in a note today that the banking system’s loans growth for June moderated to 3.4% from 3.9% year-on-year (y-o-y) growth in May, but he thinks that this could be “temporary” in nature as the stricter lockdown from June onwards could have impacted loans disbursement, which is likely to recover from 3Q21 onwards.

Wee is still expecting full-year 2021 system loans growth to stage a modest recovery to 4% versus 3.4% in 2020.

While the extended lockdown has raised some concerns that there is an upside risk to credit cost this year, he believes that this is unlikely to surpass 2020 credit cost levels of 82 basis points as most banks have adequately set aside provisions for the vulnerable groups.

“Even if we were to assume that sector 2021 credit cost [was] to mirror 2020’s 82 basis points versus our current estimates of 65 basis points, we are still expecting the sector to deliver a 12% y-o-y earnings growth (versus current 25% growth estimates). This will be underpinned by a slight improvement in net interest margin, stronger loans growth and mid-single-digit non-interest income growth,” Wee said.

He maintained his "overweight" call on the sector, as he opined “the sector’s current consolidation phase provides an excellent opportunity for investors to accumulate on weakness”.

“The sector is still expected to register a healthy earnings growth even if provisions were to surprise on the upside in 2021 while common equity tier 1 (CET1) ratio at 14.8% is well above the minimum requirement,” he said.

CIMB Group Holdings Bhd (target price [TP]: RM5.10) is Wee's top pick for the banking segment as he believes the group is best positioned within the sector to benefit from the economic recovery and reopening theme, given its strong earnings growth off a low base, attractive valuations, large cap and liquid high beta nature.

He also likes Hong Leong Bank Bhd (TP: RM22.30) and Public Bank Bhd (TP: RM4.60) for their solid asset quality track records, and RHB Bank Bhd (TP: RM6.35) for its strong capital position and well-balanced growth.

Meanwhile, Hong Leong Investment Bank Research’s analyst Chan Jit Hoong said in a note today that June’s loan growth was trending below his 3.5% to 4% full-year FY21 growth estimates, resulting in him revising his forecast down to 3% to 3.5%, particularly with lingering Covid-19 headwinds.

According to Chan, asset quality for the sector also showed some weakness as gross impaired loans (GIL) ratio nudged up three basis points month-on-month to 1.62%.

“We expect to see GIL ratio continue climbing but would not be overly worried as banks have made heavy pre-emptive provisioning in FY20 and we reckon credit risk has been adequately priced in by the market, looking at the elevated net credit cost (NCC) assumption used for FY21 by both us and consensus (above the normalized run-rate but below FY20’s level),” he said.

“Also, the government and BNM will remain supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio,” he added. 

He retained his "overweight" call on the banking sector, saying even with the nationwide lockdown, he remained optimistic on the sector taking into consideration the Covid-19 vaccination rollout, undemanding valuations, and ample market liquidity.

“Hence, any selldown is an opportunity to accumulate, in our opinion,” he added.

For large-sized banks, Chan likes Malayan Banking Bhd (Maybank) (TP: RM9.40) for its strong dividend yield, and Public Bank (TP: RM4.50) for its defensive qualities, over CIMB (TP: RM4.60).

For mid-sized banks, he said RHB (TP: RM6.85) is favoured more than AMMB Holdings Bhd (TP: RM2.85) as the former has a higher CET1 ratio and also, larger fair value through other comprehensive income reserve to buffer against potential yield curve volatility.

For small-sized banks, he said BIMB Holdings Bhd (TP: RM5.20) and Affin Bank Bhd (TP: RM2.15) are preferred over Alliance Bank Malaysia Bhd (TP: RM 2.60). Chan said he likes the former given its positive long-term structural growth drivers and better asset quality while the latter has value unlocking potential.

CGS-CIMB Research’s analyst Winson Ng noted in a report today that the industry’s total loan expanded by 1.6% in the first half, translating into an annualised rate of 3.2%. 

“This was within our projected loan growth of 2.5% to 3.5% for 2021, even if we factor in a slowdown in loan growth in the second half. Furthermore, the automatic loan moratorium, which banks started to offer on July 7, should lend support to banks’ loan growth as loans under moratorium would not be paid down within 3-6 months,” he said.

He also said the increase in GIL ratio was expected given the credit risks triggered by the Covid-19 pandemic.

He expects the GIL ratio to continue to rise to his projected 2% at end-2021.

Ng noted that total provision for banks only increased by RM978.1 million in 2Q21 versus RM2.04 billion in 1Q21 (for quarter-on-quarter [q-o-q] comparison) and RM1.24 billion in 2Q20 (for y-o-y comparison). 

From that, he deduced that the downcycle in banks’ loan loss provisioning (LLP) continued in 2Q21F, with likely y-o-y and q-o-q drops in 2Q21F LLP. 

“This, together with the expected y-o-y expansion in banks’ net interest margin, should have been the earnings drivers for banks in 2Q21F. These likely more than offset the weaker loan and fee income growth (due to the lockdown), leading to y-o-y increases in banks’ 2Q21 core net profit (stable or higher q-o-q),” Ng said. 

He reiterated his "overweight" call on banks, premised on the expected recovery in the sector’s net profit growth to a projected 9.4% in 2021.

His picks for the sector are Public Bank (TP: RM5.30), Hong Leong Bank (TP: RM20.78) and Maybank (TP: RM9.10).