HLIB sees continued recovery for banking sector with two-year CAGR of 16.6%

The analyst expects NIMs to remain stable premised on no OPR cut and benign deposit rivalry in 2021. (Photo by 123rf)

The analyst expects NIMs to remain stable premised on no OPR cut and benign deposit rivalry in 2021. (Photo by 123rf)

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KUALA LUMPUR (June 4): Hong Leong Investment Bank (HLIB) Research said it sees continued recovery in the banking sector in financial year 2021 (FY21) and FY22 with profit growing at a two-year compound annual growth rate (CAGR) of 16.6% — versus its previous estimate of 14.3%.

The research house’s analyst Chan Jit Hoong in a sector outlook today said the latest reporting season was a mixed bag as four out of eight banks under his coverage trumped expectations.

According to him, Malayan Banking Group (Maybank), Public Bank Bhd and RHB Bank Bhd saw better-than-expected net interest margins (NIMs), while CIMB Group Holdings Bhd surprised with stronger non-interest income.

Meanwhile, BIMB Holdings Bhd’s earnings were in line, while AMMB Holdings Bhd, Alliance Bank Malaysia Bhd and Affin Bank Bhd were below expectations as they booked in higher-than-expected bad loan provisions.

“Fairly inspiring reads across the 1Q21 (first quarter of 2021) reporting period as sector earnings rose 57% quarter-on-quarter and 22% year-on-year; contributors were better total income growth and lower loan loss provisions,” he said.

Going forward, he expects NIMs to remain stable premised on no overnight policy rate (OPR) cut and benign deposit rivalry in 2021.

He also noted that loan growth is seen to chug along given slower repayment versus disbursement activities from targeted assistance, the extension of the homeownership campaign and sales and service tax (SST) exemption for car sales.

While the gross impaired loan ratio is likely to creep up, he is not overly concerned as banks made heavy pre-emptive provisioning in FY20, and he reckoned credit risk had been adequately priced in, looking at the high net credit cost assumptions applied for FY21 by the market.

Even with the nationwide lockdown, he remains optimistic about the banking sector considering the Covid-19 vaccination roll-out, undemanding valuations and ample market liquidity.

For large-sized banks, he likes Public Bank (target price [TP]: RM4.50) for its defensive qualities in uncertain times and Maybank (TP: RM9.40) for its superior yield.

For mid-sized banks, RHB Bank (TP: RM6.85) is favoured for its high common equity tier 1 ratio and large fair value (FV) through other comprehensive income reserves to buffer volatile yield curves.

For small-sized banks, BIMB (TP: RM5.20) and Affin (TP: RM2.15) are preferred as he likes the former for its positive long-term structural growth drivers and better asset quality, while the latter has value unlocking potential.

At 9.55am, Public Bank had fallen four sen or 0.94% to RM4.20, while Maybank slipped three sen or 0.37% to RM8.17.

Meanwhile, RHB Bank slid five sen or 0.92% to RM5.40. BIMB and Affin Bank were unchanged at RM3.86 and RM1.72 respectively.

Surin Murugiah