KUALA LUMPUR: With the economic recovery underway, Malaysian banks could be positioned to benefit from the economic upturn as well as writebacks on the back of provisions built up since early 2020.

       While uncertainty over the Covid situation remains, RHB Research opines the path to recovery is reaffirmed by the government's recent decision to transition the Klang Valley to Phase 2 of the National Recovery Plan.

       "The long-anticipated recovery road to an endemic society is finally gaining momentum and should accelerate, underpinned by the rapid vaccination rate and lower intensive care unit (ICU) cases.

       "Given the outsized preemptive provisions, we expect future writebacks, but only when the dust settles," said RHB Research in a note.

       However, the research house cautioned that while the heavy provision cycle may end, credit costs could be lower year-on-year but remain elevated given the delayed GIL effect due to the loan moratorium.

       Among the banks, the research house expects Public Bank to see the largest writebacks relative to provisions made given its extremely prudent provisions and solid asset quality, followed by Hong Leong Bank.

       That said, any writeback cycle may only begin in 2H22, given the Pemulih moratorium, which has essentially frozen asset quality, it said.

       RHB also expects a rate hike cycle to take place before a writeback one, which could potentially boost sector performance.

       "The sector greatly outperformed the index during the last rate hike cycle back in 2010," it noted.

       Taking into account Bank Negara's decision to hold the OPR steady and its constructive comments on the recovery outlook, the research house notes the possibility of a rate hike cycle by 2H2022.

       Meanwhile, Malaysian banks also stand to benefit from fund inflows as investors have been moving funds from North Asia to Asean due to political uncertainties.

       Having been shunned by foreign investors for years, the foreign shareholding percentages in Malaysian banks have fallen to even lower levels recently, noted RHB.

       On earnings, the research house said the banks' recent results largely met expectations although management teams generally guided for a weaker 2H21 due to sequentially higher credit costs induced by the lockdown.

       However, RHB believes the higher provisions are owing to conservatism instead of any real threat from asset quality.

       "This view is echoed by banks’ normalised dividend payouts during 1H21, which signalled confidence over the recovery," it said.

       "We still expect sector earnings (excluding RHB Bank) to recover 30%, mostly on 23% lower provisions, while PIOP is growing at a mild 6%," it added.

       RHB remains "overweight" on the bank sector with its top picks being Maybank, CIMB and AMMB.