KUALA LUMPUR: AmInvestment Bank Research retained its overweight stance on the banking sector with top picks of CIMB (fair value RM5.60), RHB Bank (FV RM6.90) and Maybank (FV RM10.40).
It said on Tuesday it likes CIMB, RHB and Maybank due to the expected improvement in core operating income coming from the gradual improvement in regional operations performance, progressive improvement in underlying net interest margins (NIMs) and provisions for loan losses.
“Earnings of these banks are also expected to benefit from the improved performance of their Singapore operations which in 2020 were affected by provisions (overlays and specific provisions).
“Also, we continue to see compelling valuations for these stocks and strong capital positions, particularly the robust capital ratios of RHB Bank, ” it said.
AmInvest Research issued the report after Prime Minister Tan Sri Muhyiddin Yassin unveiled the RM150bil Pemulih economic stimulus package on Monday.
Among the measures announced were the availability of moratorium for six months to all individual loan (B40, M40 and T20) and SME borrowers commencing July 7.
“We understand that approval of moratorium for consumer loans will now be automatic while that for SME loans will be subjected to individual banks’ assessments.
“The process of obtaining approvals for moratorium on individual loans has been simplified. Borrowers are no longer required to show proof of loss of employment or reduction in income and provide documents unlike the targeted repayment assistance before this.
“The difference compared to the earlier six-month (April 1 to Sept 30, 2020) blanket automatic moratorium is that the latest moratorium requires borrowers to opt in, ” it said.
AmInvest Research said at this juncture for the latest loan moratorium, there remains a lack of clarity if interest will be allowed to be accrued and charged for all types of loans and financing. If additional interest is allowed to be charged, then modification losses (mod loss) to be reported by banks in 3Q 2021 will be minimal, in our opinion.
On the flipside, if accrued interest is to be waived for all fixed rate hire purchase (HP) and personal loans for both conventional and Islamic banking similar to that in 2020, mod loss to be reported by banks in 3Q 2021 will be larger.
Mod loss is an accounting treatment in line with MFRS 9 to factor in the time value of money due to the difference between the present value (PV) of the modified cash flows and the PV of cash flows when the fixed rate loans and financing were contracted.
The research house said as mod loss (if any) is a one-off accounting change, it does not affect its estimates on banks in 2021 and 2022 which are based on core earnings. In 2020, we have stripped out the impact of mod loss net of tax from banks’ earnings.
“Our valuation for banks, which are already based on FY22 earnings, are unchanged, ” it said.
It also pointed out the country is accelerating Covid-19 vaccinations to cover a higher percentage of the population.
More economic sectors are expected to gradually open in 2H2021, leading to the potential full reopening of the economy in November or December 2021.
“We do not expect further rate cuts from the current OPR at 1.75% which will reflect positively that the country is progressing towards economic recovery.
“We expect CASA growth for banks to remain robust in the near term with the availability of EPF withdrawals through i-Citra under the latest economic stimulus package.
“This is envisaged to improve funding cost of banks positively and increase the underlying net interest margins (NIM). Liquidity of the banking system remained healthy based on sector LCR of 152.0% and NSFR of more than 100%, ” it said.