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

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

Wee is still expecting 2021's system loan growth to stage a modest recovery to 4%, versus 3.4% in 2020.

While the extended lockdown has raised concerns of an upside risk to credit cost this year, he believes this is unlikely to surpass 2020's credit cost level of 82 basis points (bps), 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 bps versus our current estimates of 65 bps, 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 kept his "overweight" call on the sector, saying “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 in 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 separate note 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%.

According to Chan, asset quality for the sector also showed some weakness as gross impaired loans (GIL) ratio nudged up 3bps 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 also retained his "overweight" call on the banking sector, saying 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 favours RHB (TP: RM6.85) over AMMB Holdings Bhd (TP: RM2.85), as the former has a higher CET1 ratio and a larger fair value through other comprehensive income reserve to buffer against potential yield curve volatility.

For small-sized banks, he prefers BIMB Holdings Bhd (TP: RM5.20) and Affin Bank Bhd (TP: RM2.15) over Alliance Bank Malaysia Bhd (TP: RM 2.60). He 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 analyst Winson Ng noted in a report today that the industry’s total loan expanded 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 three-six months,” he said.

He said the increase in GIL ratio was expected, given the credit risks triggered by the Covid-19 pandemic, and expects the GIL ratio to continue to rise to his projected 2% at end-2021.

Ng also noted total provision for banks only increased by RM978.1 million in 2Q21, versus RM2.04 billion in 1Q21, and versus RM1.24 billion in 2Q20.

From that, he deduced that the downcycle in banks’ loan loss provisioning (LLP) continued in 2Q21F, with likely y-o-y and quarter-on-quarter 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 also kept his "overweight" call on banks, premised on the sectory's expected net profit growth recovery to a projected 9.4% in 2021. His picks are Public Bank (TP: RM5.30), Hong Leong Bank (TP: RM20.78) and Maybank (TP: RM9.10).