KUALA LUMPUR, Malaysia (June 29): Because the blanket suspension on loan repayments is offered on an opt-in basis, analysts estimate fewer modification losses for banks. Analyst Desmond Ch’ng of Maybank Investment Bank Research said in a note today that the announcement of the moratorium is likely to be detrimental for banks’ share prices in the short term, given concerns about any potential earnings impact from modification losses.
“However, in our worst-case scenario, which predicts a mod loss of similar magnitude to 2020’s modification loss, the impact on earnings for most institutions would be very manageable at 0% to 6%,” he said.
According to his estimates, Alliance Bank Malaysia Bhd will be the least affected in terms of earnings, while RHB Bank Bhd will be the most affected.
The government stated yesterday that a second six-month blanket lending embargo will begin on July 7. In contrast to the one that occurred from March to September last year, borrowers will be required to ask for a postponement this time and may even be required to sign updated terms to their loan agreement, according to Ch’ng.
Ch’ng kept his “buy” call on CIMB Group Holdings Bhd (TP: RM4.90), BIMB Holdings Bhd (TP: RM4.75), Hong Leong Bank Bhd (TP: RM20.90), RHB (TP: RM6.30), and AMMB Holdings Bhd (TP: RM2.90).
The effect on the price-to-book value appears to be minor.
According to Tan Ei Leen of Affin Hwang Capital, a potential RM1 billion modification loss will result in a 3.2 percent decline in the sector’s earnings this year, while the impact on the sector’s price-to-book value (P/BV) appears to be minor.
According to Tan, this latest loan repayment freeze differs from the 2020 moratorium in that interest is not imposed on deferred instalments, so borrowers — particularly those whose cashflow was unaffected by the epidemic — are likely to be less motivated to opt in this time.
She believes that due to their large loan exposures in the car market, as well as fixed rate Islamic financing, Public Bank Bhd, RHB, Malayan Banking Bhd (Maybank), and CIMB will be the most impacted in 2020.
Meanwhile, Alliance and AMMB were the least affected, owing to the offsetting impact of the zero-cost funds disbursed by Bank Negara Malaysia Special Relief Funds and Credit Guarantee Corporation Malaysia Bhd (CGC) to small and medium companies (SMEs).
She kept her “overweight” rating on the sector, expressing confidence that a successful vaccination deployment will result in economic recovery in the second half of 2021. CIMB is her top choice (buy, TP: RM5.80).
Analyst Chan Jit Hoong of Hong Leong Investment Bank Research believes the opt-in loan moratorium will have little impact on banks.
“In any case, a day 1 modification loss is a non-cash accounting entry that can be reversed over time.” As a result, we’re considering it as a one-of-a-kind object,” he explained.
According to him, Affin Bank Bhd and CIMB incurred the highest losses compared to their earnings base as a result of the first modification loss recorded in 2Q last year, while Alliance and Maybank were the least affected.
On the banking sector, he maintained a “overweight” rating. He prefers Maybank (TP: RM9.40) and Public Bank (TP: RM4.50) above CIMB for large-sized banks because of their substantial dividend yields and defensive capabilities (TP: RM4.60).
RHB (TP: RM6.85) is preferred above AMMB (TP: RM2.85) among mid-sized banks because the former has a stronger common equity tier 1 (CET1) ratio and a larger Fair Value via Other Comprehensive Income (FVOCI) reserve to protect against anticipated yield curve volatility.
BIMB (TP: RM5.20) and Affin (TP: RM2.15) are preferable to Alliance (TP: RM2.80) for small-sized banks; he prefers the former due to positive long-term structural growth drivers and higher asset quality, while the latter has value unlocking potentials.
Following the recent embargo, profit guidance could be revised downwards for the first quarter.
However, according to Kenanga Research analyst Clement Chua, there is uncertainty about the banks’ overall exposure to modification loss at this time, and in 2020, the ten banks covered by his firm were exposed to about RM5.2 billion in modification loss, which was expected to be gradually unwound in the years ahead.
He predicted that the moratorium will lead to an increase in targeted assistance programs by banks, ranging from 7% to 16 percent of gross loans.
This might lead to increased credit cost provisioning as a shaky economic environment and income streams result in more delinquencies, not to mention stifling loan demand in the short run.
“As a result, we expect banks to revise their corporate forecast to the downside following the 1Q2021 results,” he said.
With the current macroeconomic backdrop in place, he also believes that his earlier industry loan growth forecast of 4% to 5% was unduly optimistic.
As a result, he takes advantage of the chance to raise his loan growth forecasts for the banks he covers from 3% to 4%.
In the absence of the foregoing, he believes that investors’ demand will shift away from banks.
He lowered his rating on the sector to “neutral” because of the earnings risks posed by modification losses, greater provisioning, and slower-than-expected loan growth.
He suggested accumulating Maybank (outperform; TP: RM10.65) for those who must stay invested since its strong dividend yield potential (7 percent to 8% ) will continue to give a cushion to investors seeking a long-term position.
He also mentioned that RHB (outperform; TP: RM6.20) has an industry-leading CET-1 reserve of roughly 16 percent, which allows for more capital management measures to be used, especially in these difficult times.
Also read:The Prime Minister announces an automatic blanket debt repayment moratorium for people, as well as the i-Citra EPF withdrawal scheme. Continue reading
