Uncertainties weigh on banking stocks

Shares in Public Bank Bhd closed 44 sen lower at RM16.56 apiece yesterday, while Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd fell 17 sen and 13 sen to RM7.50 and RM3.46, respectively.

Hong Leong Bank Bhd, on the other hand, plunged 70 sen to RM14.30, while RHB Bank Bhd declined by 10 sen to RM4.92.

Loan approvals and applications in June have exceeded analysts’ expectations thanks to the cheap lending cost.

This year, Bank Negara went full-throttle to boost the Malaysian economy and cut interest rate by four times due to the coronavirus (Covid-19) fallout.

In July, the central bank cut its overnight policy rate (OPR) to 1.75%, the lowest since 2004.

The cut in interest rate could impact banks’ earnings moving forward and potentially result in higher loan loss provisions due to the end of the blanket moratorium.

Maybank IB Research said the overall loan growth in June was higher than expected as sentiment improved from the partial relaxation of the movement control order (MCO) and the stimulus package announced by the government to buffer the economy from the Covid-19 crisis.

It said the banks’ loan growth grew 4.1% year-on-year (y-o-y) in June, which is higher than its estimation of 2% for the year.

Interestingly, the banks’ asset quality improved in June to 1.46% in gross impaired loans (GIL) from 1.55% in May.

Maybank IB expected the banks’ asset quality to remain at the same level until September due to the loan moratorium as consumers and SMEs have their credit positions frozen for now.

“As such, the current GIL numbers do not fully reflect the actual economic situation, ” it said in a note to clients.

AmInvestment Bank Research said household loans gained traction to 3.5% y-o-y from higher levels of mortgages and loans for the purchase of securities through stronger disbursements.

Meanwhile, non-household loan growth was unchanged at 4.9% y-o-y.

“Loan disbursements have improved from the low levels in April and May 2020, ” AmInvestment said in a report.

On loan application, the research house said the banks’ loan applications rebounded to 8% y-o-y due to higher applications for passenger cars, residential property loans, credit cards and personal loans.

This compared to a contraction of application of 39% y-o-y in May 2020. Loan approval in June has improved significantly to 12.7% y-o-y in June compared to a contraction of 54.4% in May.

“With the dovish statement by Bank Negara in the recent monetary policy committee statement, we are expecting another OPR cut of 25 basis points in the second half of this year to 1.50%, ” AmInvestment said.

Analysts are mainly neutral on the targeted loan moratorium replacing the blanket moratorium starting October.

However, UOB Kay Hian Research warned that the large-scale targeted moratorium starting October could lag GIL formation and lead to overhang in the banking sector’s performance.

“We expect the overall industry GIL ratio to potentially peak by end-2021, ” it said.

UOB Kay Hian reckoned that the banking sector would post a more meaningful recovery from the second quarter of 2021 onwards.

“While it is too early to gauge the overall level of customers that would require the targeted loan assistance when the automatic loan moratorium ends in September, certain banks have recently provided guidance of up to 30%.”

Last month, Prime Minister Tan Sri Muhyiddin Yassin announced that the blanket loan moratorium would be replaced with a targeted moratorium in October for individuals who have lost their jobs and who have yet to find new jobs.

The targeted loan moratorium will be for three months and a further extension could be granted if individuals are still unsuccessful in securing jobs.

UOB Kay Hian said the banking sector is trading at 0.85 times 2021 forecast price-to-book ratio, which is only slightly below the Global Financial Crisis low of 0.95 times and broadly correlates with its current 2021 sector return on equity of 7.5%.

“We think 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 in end-September, ” it said.