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Maybank IB Research has buy calls on Hong Leong Bank, HLFG, RHB Bank, AMMB and BIMB.

KUALA LUMPUR: Maybank Investment Bank Research projects banks' net profit to rebound 12% after contracting 20% in 2020 while it stays neutral on the sector and prefers mid-cap stocks for exposure.

“We thus have buy calls on Hong Leong Bank, HLFG, RHB Bank, AMMB and BIMB, ” it said in its research note on Friday.

Maybank Research acknowledged that challenges prevail into 2H20, while the key unknown at this stage being credit costs post loan moratorium. Nevertheless, 2021 should see more stable net interest margins (NIMs) and lower (albeit still elevated) credit costs.

Commenting on the second quarter 2Q20 results, it said there was the recognition of modification losses (mod loss) which totaled RM1.78bil (before tax) for the banks under its coverage.

Including the mod loss, 2Q20 aggregate net profit dropped 42% YoY while 1H20 aggregate net profit contracted 27% YoY. Excluding the mod loss, 2Q20 core net profit declined 21% YoY and 1H20 core net profit fell 17% YoY.

It said the primary drag in 2Q20 was the surge in credit costs, the bulk of it being pre-emptive in nature. Interestingly, aggregate core operating profit fared well (+10% YoY in 2Q20), supported by an expansion in net interest income (despite a 27bp QoQ contraction in NIM, offset by strong current account/savings account growth), higher investment gains and cost savings during the Movement Control Order (MCO) period.

Maybank Research pointed out challenges into 2H20 remain the same: 1) moderate loan growth, 2) ongoing NIM compression, 3) the normalisation of expenses and 4) potentially higher credit costs.

“For the banks in our coverage, we expect 2020 operating and net profit to contract by 0.4% and 20.4% respectively.

“Into 2021, we expect NIMs to expand YoY and loan growth to pick up. However, overheads are expected to normalise while investment income is likely to be weaker YoY.

“We thus project 2021 operating profit growth of just 1.9%, but higher net profit growth of 11.7% YoY on lower credit costs. We expect a steep decline in average ROEs to 7.6% in 2020 from 10.2% in 2019, improving to 8.2% in 2021.

“Our dividend per share estimates for FY20 are lower YoY across the board, mainly because of the lower earnings that we are projecting this year, coupled with lower payout ratios for all banks, except Public Bank, for which we deem earnings risks to be low, given its superior loan loss coverage of 302%, including regulatory reserves, ” Maybank Research said.

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