KUALA LUMPUR (June 29): Analysts expect the latest blanket moratorium on loan repayments to cause lower modification losses for banks as it is being offered on an opt-in basis.
Maybank Investment Bank Research’s analyst Desmond Ch’ng said in a note today that the announcement of the moratorium is likely to be negative on banks’ share prices in the near term, given uncertainties over any potential impact to earnings from modification losses.
“Nevertheless, in our worst-case scenario, which assumes a mod loss of similar quantum to 2020’s modification loss, the impact to earnings would be quite manageable at 0% to 6% for most banks, in our view,” he said.
Based on his estimate, the banks that will be least impacted in terms of earnings would be Alliance Bank Malaysia Bhd while the most impacted would be RHB Bank Bhd.
The government yesterday announced a second blanket loan moratorium for six months starting July 7. Ch’ng said in comparison with the one that took place from March to September last year, borrowers will need to apply for a deferment this time around and may even have to sign revised terms to their loan agreement.
Ch’ng maintained his "positive" call on the banking sector, and maintained "buys" on CIMB Group Holdings Bhd (target price: 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).
Impact on price-to-book value appears minimal
Meanwhile, Affin Hwang Capital’s analyst Tan Ei Leen said based on her simulation, a potential RM1 billion modification loss will result in a 3.2% contraction on the sector’s earnings for this year, while the impact on sector price-to-book value (P/BV) appears minimal.
However, Tan said this latest loan repayment freeze was unlike the 2020 moratorium where interest was not charged on deferred instalments, thus borrowers — especially those whose cashflow had not been affected by the pandemic — are likely less incentivised to opt in this time.
Looking at the mod-loss experience in 2020, she opined that Public Bank Bhd, RHB, Malayan Banking Bhd (Maybank) and CIMB were the most impacted due to their huge loan exposures in the auto segment, as well as fixed rate Islamic financing.
Meanwhile, Alliance and AMMB were the least impacted largely because of the offsetting impact from the disbursement of Bank Negara Malaysia Special Relief Funds and Credit Guarantee Corporation Malaysia Bhd (CGC) funds to small and medium enterprises (SMEs) which are derived at zero capital cost.
She maintained an "overweight" call on the sector, reiterating her optimistic view that a successful vaccine rollout will lead to economic recovery in the second half of 2021. Her top pick is CIMB (buy, TP: RM5.80).
Hong Leong Investment Bank Research’s analyst Chan Jit Hoong also opined that the opt-in loan moratorium is unlikely to have significant impact on banks.
“In any case, day 1 modification loss is a non-cash accounting entry and is gradually reversible in the future. Thus, we are treating it as an exceptional item,” he said.
Based on the first modification loss booked in 2Q last year, he said, Affin Bank Bhd and CIMB chalked most losses relative to their earnings base, while Alliance and Maybank were least affected.
He retained an "overweight" call on the banking sector. For large-sized banks, he likes Maybank (TP: RM9.40) for its strong dividend yield offering, and Public Bank (TP: RM4.50) for its defensive qualities, over CIMB (TP: RM4.60).
For mid-sized banks, RHB (TP: RM6.85) is favoured more than AMMB (TP: RM2.85) as the former has a higher common equity tier 1 (CET1) ratio and also, larger Fair Value through Other Comprehensive Income (FVOCI) reserve to buffer against potential yield curve volatility.
For small-sized banks, BIMB (TP: RM5.20) and Affin (TP: RM2.15) are preferred over Alliance (TP: RM2.80); he likes the former given its positive long-term structural growth drivers and better asset quality while the latter has value unlocking potentials.
Latest moratorium could lead see earnings guidance after 1Q results revised downwards
However, according to Kenanga Research’s analyst Clement Chua, there is an uncertainty on the overall exposure in modification loss by the banks this time and in 2020, the ten banks within his coverage were exposed to about RM5.2 billion in modification loss which was supposed to be progressively unwound in the years to come.
He said the moratorium would hence translate to an expansion in target assistance programs by the banks, ranging between 7% and 16% of gross loans.
“This could translate to further credit cost provisioning as a troubled business environment and income streams would lead to more delinquencies, not to mention hampering loan demands in the near term.
“As such, we anticipate downside bias revisions to the corporate guidance by the banks post-1Q2021 results,” he said.
With the current macro-economic environment in place, he also believed that his previous industry loans growth assumption of 4% to 5% could be overly optimistic.
Thus, he takes the opportunity to revise his loans growth expectations for the banks under his coverage to 3% to 4%.
In lieu of the above, he reckoned that investors’ appetite is likely to pivot away from the banks.
He downgraded the sector’s call to "neutral" as there are earnings downside risks arising from modification losses, higher provisioning, and weaker-than-expected loans growth.
For those who have to stay invested, he recommended accumulating Maybank (outperform; TP: RM10.65) as its strong dividend yield potential (7% to 8%) will continue to provide a cushion to investors seeking a long-term position.
He also pointed out that RHB (outperform; TP: RM6.20) commands an industry leading CET-1 reserve of about 16% which enables greater allowance to implement capital management strategies, particularly during these uncertain times.
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