KUALA LUMPUR (September 8): Bank stocks could see better days ahead as the sector’s risk-return profile continues to tilt favorably on the upside, with analysts believing that most of the negatives have been taken into account by the market .
Analysts also estimated that sector sentiment will remain positive through the fourth quarter of the year (4Q21) even though the cost of credit is expected to increase in the second half (2H21), supported by the economic reopening on high vaccination rates. , positive potential for dividend surprises and attractive valuations.
UOB Kay Hian Pte Ltd analyst Keith Wee said that taking a longer-term investment horizon, the average dividend yield for the sector in 2022 is now hovering around a commendable 5.3. % against its historical average of 4.5%.
“In the meantime, the current implied yield of 4% for 2021 is broadly in line with historical levels, despite the impact on earnings from still high provisions. Our dividend payout ratio assumption for 2021 remains conservative at 40% (2019: 48%), “he said in a sector report today.
Wee added that banks are expected to record a net change loss in 3Q21, resulting from the recent increase in targeted aid from 14% to 27%.
“However, the impact will be significantly lower than the 1.7 billion ringgit (8% of sector revenues) that the sector experienced in 2020. Indeed, the increase in the rate of use of targeted aid by about 15 ppts (percentage points), this cycle is well below the participation rate of 85% in 2020, given the opt-in nature of the current targeted aid.
“Additionally, clients who choose to extend their loan term to reduce their monthly loan repayment will end up having to pay higher accrued interest, which would essentially help partially offset loan modification losses. Overall, we estimate a potential sector – large net loan modification loss impact of only 1% to 1.5% of our 2021 segment profits [forecast] against the 8% impact in 2020, ”he said.
Hong Leong Investment Bank (HLIB) analyst Chan Jit Hoong, meanwhile, expects Net Interest Margin (NIM) to come under slight pressure, based on a brewing deposit rivalry and a limited scope for further expansion of the current account savings account (CASA).
“That said, loan growth is expected to accelerate given the gradual economic reopening as part of the national stimulus package. On the other hand, the gross impaired loan ratio (GIL) is likely to increase, but we are not. not too worried because the banks have made heavy preventive measures provisioning during the financial year 2020 (FY20) and we believe that the credit risk has been correctly taken into account by the market, by examining the assumption of credit load high net (NCC) applied for FY21 by us and consensus (above normalized execution rate but below FY20 level), ”he said in a sector report today.
On forecast, Chan now projects a three-year compound annual growth rate (CAGR) of 15.2% aggregate profit (calendar year 2020). [CY20]-CY23) for the industry compared to the research firm’s previous estimate of 14.9% after some earnings revisions this reporting season.
Still “overweighted” on banks
Wee and Chan both agreed that local banks reported a fairly commendable set of profits in 2Q21, both maintaining their “overweight” call on the banking sector.
Regarding the best choices, Wee said that CIMB Group Holdings Bhd (target price [TP]: RM5.50) remains the top industry pick for the company, supported by its stronger earnings recovery and attractive valuations, as well as its liquid nature and high beta, which should bode well for the bank in the future. the current context of economic reopening and cyclical recovery. RHB Bank Bhd (TP: 6.35 RM), on the other hand, is the second sector choice of the company given its attractive dividend yield, high ratio of Common Equity Tier 1 (CET1) and its high beta.
“As the recovery theme gains traction, our top picks have turned to higher beta bank names with strong growth potential from the earnings recovery,” Wee said.
Meanwhile, as with the big guys, Chan prefers Malayan Banking Bhd (Maybank) with a TP of 9.40 RM for its high dividend yield, and Public Bank Bhd (TP: 4.50 RM) for the quality of its assets. resilient.
For medium-sized banks, RHB Bank Bhd (TP: 6.85 RM) is preferred for its high CET1 ratio and its significant fair value reserves via other comprehensive income (FVTOCI) to cushion the potential volatility of the curve. rates.
For smaller banks, BIMB Holdings Bhd (TP: RM4.80) and Affin Bank Bhd (TP: RM2.15) are preferred. HLIB likes the former for its positive long-term structural growth drivers and better asset quality, while the latter has the potential for value creation.
“In our opinion, the woes of Covid-19 will likely end in 2022, while the state of the economy and the banking sector will only improve over time. In addition, valuations are not demanding and there is a lot of liquidity in the market, ”Chan added. .
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