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Thursday, March 19, 2020

Earnings contraction seen for banking sector

Thursday, 19 Mar 2020

PETALING JAYA: The banking sector could see an earnings contraction of around 7% this year, in light of the current challenging economic environment.

UOB Kay Hian said in a report yesterday that it is expecting a 6.8% sector earnings contraction in 2020, before a year-on-year recovery of 5.2% in 2021.

“Note that we have not changed our net credit cost assumption which currently factors in a gradual increase from 24 basis points in 2019 to 29 basis points in 2020. Assuming net credit cost were to rise by an additional 10 basis points in 2020, this would impact our sector earnings by an additional 5%.

“As such, credit cost remains a key swing factor.”

UOB Kay Hian noted that the banking sector has declined by 24.3% year-to-date, compared with the FBM KLCI’s 20.3%. This, it said, brings the banking sector’s price-to-book to below its 10-year historical mean.

“Banks in general have guided that sectors most directly impacted by the Covid-19 (namely airlines, hospitality manufacturing companies linked to supply chains) represents on average 2% to 3% of their loan books.“

However, looking at Bank Negara statistics, wholesale, retail, restaurants and hotels comprised a larger 7% of total system loans. As such, if the virus were to remain protracted, we would not discount the possibility for the system net credit cost to rise by a larger-than-expected rate.”

In terms of large-cap picks, UOB Kay Hian said it likes CIMB as the stock is trading below its trough price-to-book and only 10% away from the research house’s trough price-to-earnings valuation.

“As Maybank has declined by a smaller extent given its lower foreign shareholding and dividend appeal, the stock continues to exhibit the largest downside risk to its trough price-to-earnings valuation and its relatively high oil and gas (O&G) portfolio to peers could be viewed as a potential risk, if the low oil prices were to continue.

“In the mid-cap space we like Hong Leong Bank, given its low foreign shareholding, above-industry loans growth and low O&G exposure.”

Separately, UOB Kay Hian said the 2016 oil price crash and SARS would be a better representation of the banking sector’s credit cost experience, given the impact of the low oil prices and Covid-19 crisis.

“During the SARS period, the sector’s net credit cost had only inched up by two basis points while the oil price crash in 2016 resulted in a larger 10 basis points increase in the sector’s net credit cost; but this only impacted selected banks like Maybank, RHB and CIMB, which saw an average 20 basis point increase in net credit cost.”

The research house said: “We believe that O&G companies are in a much stronger financial position (average net gearing declined to 38% as at June 2019 compared with 52% in December 2018), while the O&G sector’s exposure has also declined to less than 2% from 2.8% in 2016.”

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