KUALA LUMPUR (Aug 6): As the pandemic sees resurgence in various corners of the world, banking analysts expect narrowing net interest margin (NIMs) and potentially deteriorating asset quality to continue to weigh on banks, moving forward.

CGS-CIMB Research expects banks’ net interest margin to contract by about 10 basis points (bps) year-on-year in the second quarter of the year (2Q20), due to the 50bps cut in the overnight policy rate (OPR) in May 20.

“Another potential dampener for banks’ 2Q20 net profit would be the modification loss for hire purchase loans,” it said in its July 31 report, where it pinned a 'neutral' call on the sector, with its top picks being Public Bank Bhd, RHB Bank Bhd and AMMB Holdings Bhd.

Based on June 2020 banking statistics, CSG-CIMB Research deduced that loan growth was stable at about 4% yoy at end-March and end-June, and that 2Q20 loan loss provisioning could have increased quarter-on-quarter, as the total provision for the industry rose by RM1.36 billion in 2Q20, versus an increase of RM1.14 billion in 1Q20.

Hong Leong Research, which is also neutral on the sector, said interest spread has shrunk.

“Both the average lending and three-month board fixed deposit rates slipped 12bp and 2bp month-on-month, respectively. As a result, the spread contracted 10bp m-o-m to 2.03%. We reckon the squeeze will persist and we see a weaker NIMs outlook given the recent OPR reduction and potentially another one (-25bp) in 2H20,” it said in its Aug 3 report.

Hong Leong Research noted that the only bank it likes now is RHB Bank, on which it has a target price of RM5.80, “given its appealing risk-reward profile, backed by undemanding valuations, strong CET1 ratio of 16.6%, and relatively large untapped FVOCI (Fair Value through Other Comprehensive Income) reserves”.

Kenanga Research, which also has RHB as its top sector pick, is of the view that banks' earnings ahead remain uncertain and volatile, while the path to recovery is unlikely to be clear cut.

“Early signs from banking statistics suggest that pre-emptive loan provisioning may see an acceleration in 2Q. In mitigation, the re-opening of the economy and significant cuts to policy rate have helped clear some overhang for the sector,” it said in an Aug 3 report.

UOB KayHian Research, meanwhile, noted that system loan growth remained stable in June, but it expects this “growth to moderate downwards as leading loan growth indicators remain weak”.

It also pointed out that “asset quality has not reflected Covid-19 impact”.

“Sector GIL (gross impaired loans) declined 3.4% y-o-y, with the GIL ratio declining to 1.46% in June 20 from 1.55% in May 20. The loan moratorium continues to mask the potential Covid-19 induced asset quality stress,” it said in a report, also dated Aug 3.  

“Given the government’s announcement to extend the loan moratorium on a targeted basis, we expect asset quality trends to remain stable for the rest of 2020. However, banks are expected to continue frontloading provisions ahead, [so] we are forecasting a tripling in system net credit cost in 2020 and for it to remain elevated in 2021,” it added.
 
UOB KayHian also noted that the banking sector is trading at 0.85x 2021F price-to-book, which it said is only slightly below the Global Financial Crisis (GFC) low of 0.95x, and broadly correlates with its current 2021 sector return on equity or ROE forecast of 7.5%.

The foreign research house, meanwhile, reckoned "it is too early to upgrade the sector as asset quality uncertainties persist with banks still unable to accurately estimate the level of provisions required post loan moratorium (end-Sep 20)".

“Given the unprecedented impact on the economy, provisions are likely to remain elevated going into 2021. As such, even as the market is trying to price in a 2021 recovery, we note that sector ROE of 7.5-7.5% (consensus: 8.0%) in 2021 remains well below pre-Covid-19 levels of 9%-10% when sector valuations were hovering around 1.0-1.1x P/B,” it said.

UOB KayHian Research has maintained its market weight call for the banking sector, with its top pick also being RHB Bank.