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Banking system well-positioned to absorb Covid-19’s potential damage — HLIB Research

KUALA LUMPUR (April 6): Although the impact of Covid-19 on the economy is significant, banks are entering this laborious period from a position of strength, with more than ample capital and liquidity buffers, according to Hong Leong Investment Bank Bhd Research (HLIB Research).

“We take great comfort that the banking system is well-positioned to absorb the potential damage from Covid-19, given prudent capital and liquidity buffers built up over the years,” said HLIB Research in a note today.

“From BNM’s (Bank Negara Malaysia) stress test, CET1 ratio is projected to decline to 8.5% in a protracted recession setting, which is still comfortably above the 4.5% minimum level,” the research house added.

Noting that the debt-at-risk from the household sector remained low at 5% of total household debt, HLIB Research said the potential losses to the banking system were estimated to be between 42% and 68% of banks’ excess capital buffers, based on BNM’s sensitivity analysis that simulates the impact of severe stress scenarios on borrowers’ debt servicing capacity,

HLIB Research opined that the banks’ excess capital buffers were sufficient to cover between 2.5 and 3.6 times of the potential credit losses from large borrower groups that are more likely to default under BNM’s assumed stressed conditions.

For the businesses segment, it is observed that while there is a climbing trend for debt-to-equity and falling interest coverage ratio, both were still at un-alarming levels of 25.1% and 4.6 times respectively, said HLIB Research, adding that the cash-to-short-term-debt ratio was stable and healthy at 1 times and the banks’ exposure to large borrowers has fallen to 38.4% of total business lending, from 42.7% in 2018.

The research firm has maintained a neutral rating on the banking sector, saying that the sector is compensated by its inexpensive valuations whereby its price-to-book value (P/B) is now below -2 standard deviation (SD) and Global Financial Crisis’s (GFC) level, albeit near headwinds that will put a dent on the profitability of the banks.

“We like banking stocks that were acutely bashed down and especially those with P/B below 1 times, GFC’s trough, and -2SD,” said HLIB Research. The note also showed that Malayan Banking Bhd (1 times), Public Bank Bhd (1.3 times) and Hong Leong Bank Bhd (1 times) have P/B of 1 times or more.

“We like banks that were acutely bashed down; preferred picks are CIMB [Group Holdings Bhd] (target price (TP): RM4.70) and Alliance [Bank Malaysia Bhd] (TP: RM2.50),” said the research firm, adding that other “buy” ratings are RHB Bank Bhd (TP: RM5.40) and BIMB Holdings Bhd (TP: RM3.70).

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