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Wednesday, April 1, 2020

Banking - Standing Resilient

Looking ahead to the impending downturn ahead, we have slashed earnings estimates of our banking stocks universe by 11% as we revised our loans, and NIM compression downwards with uptick in credit charge. However looking at their CET1s, we find the stocks well capitalised with the most adverse erosion likely to be buffered by their CET1 ratios that is well above the required regulatory level. Our Top Picks are MAYBANK (OP, TP: RM8.50) and PBBANK (OP, TP: RM18.55) which we believe are prime beneficiaries from a resilient CET1.

Looking further ahead into 2020, as the economy slides from the growing pandemic, loans growth will be challenging and at the same time further downside pressure on asset quality is anticipated. We believe the recent measures announced by BNM will mitigate pressure on asset quality especially on each banks’ credit assessment; hence, most likely, credit charge reporting will not be as severe as in previous economic downturn i.e. 2008-09 Global Financial Crisis. The implementation on Basel III standards beforehand and bringing down the high Household debt have prompted the banks to be very selective in portfolio exposure mitigating the potential uptick in asset quality deterioration.

Furthermore, the recent measures (6-month moratorium, Restructure & Rescheduled) will support the mitigation in asset quality deterioration. Loans growth will be challenging ahead not only attributed to the sliding economy but also to the banks’ risk averse stance on lending ahead, mindful of risks emanating from a global recession. The recent liberalisation of lending requirement applies only to purchase of shares and to the broad property sector (heavily collateralised – reducing credit loss assessments); thus, we believe banks will still be risk averse in lending ahead especially to those that are low-collateralised and areas slow in recovering from the impending economic downturn – all this to protect credit loss assessments and asset quality.

Given the expected downturn ahead, we have revised our FY20E earnings ahead based on these premises; (i) revising down loans expectations, (ii) further NIM compression, and (iii) raising credit costs. We expect loans growth in the banking universe to taper down to ~+3% (from +5% previously). We expect overall NIM compression to reach 12bps (from 4bps) previously on account of another 2 rate cuts in 2020. We raised our industry credit costs assumption by 11bps to 0.43%. The recent BNM measures introduced will mitigate surge in gross credit charge in a downturn, but we expect bad debts recoveries to taper off and at the same time uptick in bad debts written off, necessitating an uptick in net credit charge. For most of the banks, our new credit charge assumptions are similar to the level seen in the previous Global Financial Crisis.

The stocks in our banking universe are undemanding given the steep dive in recent weeks and currently trading at well below their 5-year mean PBV. Applying the various adverse scenarios with CET1 erosion of 300-500bps, we find most of banks well buffered enough with CET1 still above the required regulatory level of 7.0%. Given these adverse scenarios, most the stocks are trading well below their implied Fair Value. Our Top Pick for the sector is MAYBANK and PBBANK. We like both for their strong and robust CET1 and given the adverse scenarios and erosion of CET1, both stocks’ CET1 will remain resilient at 10.9% and 10.5%, respectively, and well above the required regulatory levels. With revised assumptions, our new TP are RM8.50 for MAYBANK and RM18.50 for PBBANK.

Source: Kenanga Research - 1 Apr 2020

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