KUALA LUMPUR (July 7): Bank stocks held firm today despite Bank Negara Malaysia (BNM) cutting its overnight policy rate (OPR) by 25 basis points (bps) to a record low of 1.75%.

At market close, the 10 listed bank stocks did not register significant price changes, with daily price percentage changes of within -1.4% to 1.26%.

Four banks finished in positive territory and four other lost ground, while the remaining two counters closed unchanged.

Meanwhile, all of them are lower year-to-date by between -9.49% and -28.16%, given the grim prospects in the banking business.

Banking analysts, including two heads of research at foreign houses, think the reason banking stocks did not move was because the news had already been priced in.

Fourteen of the 25 economists surveyed by Bloomberg correctly predicted a 25bps reduction in the OPR, while four others had even expected a bigger cut of 50bps.

Hong Leong Investment Bank banking analyst Chan Jit Hoong believes that banking stocks were "reasonable today", but "there is the overhanging concern on the potential impact of the loan moratorium" when it ends in September.

This view is shared by one of the heads of research, but the other head of research reckons that banking stocks are overvalued "considering the earnings risk that lies ahead".

"Asset quality risk is the main concern and it's difficult to gauge the extent of the default risk until loan moratorium ends," he pointed out.

There are concerns that with the moratorium ending on Sept 30, a number of borrowers will have trouble paying their loans, given that unemployment rate crept up to 5% in April from 3.2% at the start of the year.

Meanwhile, BNM has indicated that it has no intention to extend the moratorium.

"The main thing to watch out for when it comes to banking stocks is post moratorium and how that would impact banks. If nothing improves on the ground, the biggest worry is the non-performing loans' spike post September," said a head of research at a foreign research house.

"We need to know the ability of people paying their loans, can they pay their loans? Almost 90% of eligible customers have taken up the automatic moratorium. This is for across the banks and that is high," he added.

Both heads of research concurred that the latest OPR cut is expected to hit the earnings of banks by an average of 2% to 3%.

There is also growing concern of banks lowering their dividend payments, as analysts have observed that banks had declared lower dividend payouts in the recent financial quarters.

AMMB Holdings Bhd (which owns AmBank) and Alliance Bank Bhd have lowered their dividends for financial year 2020 as compared with previous years.

"The test will be the upcoming June's quarterly results when most banks (with December year end) typically pay interim dividends. So all eyes will be on that," said a banking analyst.

Given the uncertain outlook on banks, HLIB's Chan opined: "It is best to stay sidelined until we can get a better picture of how bad it would be post moratorium. For those who insist on having exposure, RHB Bank is our preferred pick."

In terms of valuations, six banks are currently trading at price-to-book (PB) value of less than one. They include RHB Bank Bhd (0.77 times), CIMB Group Holdings Bhd (0.67 times), Alliance Bank Malaysia Bhd (0.57 times), AMMB Holdings Bhd (0.52 times), Malaysia Building Society Bhd (0.47 times) and Affin Bank Bhd (0.34 times).

One banking analyst suggested comparing the banks' PB ratios against their respective forward 12-month estimated return-on-equity ratios, to better gauge their valuations.