KUALA LUMPUR (June 4): 2020 is a “washout year for the banks”, said Maybank Kim Eng banking analyst Desmond Ch’ng, as the sector will bear the brunt of the global economic downturn caused by the COVID-19 outbreak.

But he believes Malaysian banks will be able to pull through the challenges. Indeed, Maybank Kim Eng sees the banking sector to be a potential recovery play next year as valuations look reasonable now.

Ch’ng anticipates banks’ loan growth will decelerate to 2% this year, while net interest margin (NIM) would shrink by 10 to 12 basis points. Worse, credit costs have more than doubled plus investment income is lower.   

He forecasts earnings contraction of 18% year-on-year for the banking sector.

Nonetheless, he told the audience in a virtual conference at Maybank Kim Eng's investment forum that the domestic banking sector will be on the recovery path next year.

He expects upside surprises on banks earnings. “We expect credit cost to ease and banks NIMs to improve as deposits start to reprice downwards and there will be room for surprises predominantly on the credit cost side.”

When the loan moratorium ends at the end of September, Ch’ng says it is until then the banks can gauge the credit-worthiness of their customers moving forward. “Banks can actually put through the bulk of their provision this year that could be poised for a strong recovery next year,” he said.

Revival of M&A stories?

Maybank Kim Eng’s Head of Regional Equity Research Anand Pathmakanthan said potential mergers and acquisitions (M&As) among the banks could be an “interesting” watch.

“Clearly, there has always been a push by Bank Negara for the sector to consolidate. So you may see some revival of merger stories there,” he said.

Nonetheless, Anand noted that mergers between banks are not easy feats to pull off even when valuations are cheap.