Malaysia Banks – Are We There Yet?
In a report dated today, Macquarie Equities Research (MQ Research) remains constructive on banks into 2021 although upside has narrowed following a sharp rally in recent weeks. MQ Research notes that Malaysian banks are still trading 12% below trailing three-year price to book and there is still potential upside on the bull case if value rally persists through 2021.
Conclusion: There is still upside for banks
MQ Research remains constructive on banks into 2021, even if upside has narrowed following a sharp rally in late-2020. MQ Research reiterates RHB and CIMB as its top Outperform picks, and upgrade Public to Outperform as its big-cap recovery play. MQ Research downgrades HLBK to Neutral following recent share price strength, maintain Maybank as Neutral but downgrade AMM to Underperform. MQ Research expects interest margins to recover in the next few quarters, as the excess system liquidity will substantially offset the lower benchmark interest rates (-125bps in FY20). Credit costs will remain elevated in FY21, with peak impairments only expected in late-2021/early-2022. Nonetheless, FY20 should mark rock bottom for banks’ provisions. Consumer borrowers have proven substantially more resilient than initially feared, underpinned by manageable stress to the labour market. Blanket moratoria, a key idiosyncratic risk to Malaysian banks, is highly unlikely to see a return following the policy shift to (opt-in) repayment assistance targeted to low-income households (B40).
The bottomed-out provision expectations have been a key catalyst for the recent value rally. MQ Research expects two more catalysts: 1) over the next 12-18 months, improving visibility in the macroeconomic outlook (vaccine deployment, political impasse resolved) will be the primary driver; 2) by mid-late CY22, MQ Research expects the discussion on interest rate hikes to begin in earnest as unemployment starts to fall back to pre-COVID levels.
MQ Research adjusts key Gordon growth model inputs across the banks. A low interest rate environment and scepticism on banks’ ability to structurally reduce costs leads MQ Research to trim long-term sustainable return on equities (ROE) assumptions. However, the lower ROE impact is offset by a post-crisis capital release (especially with RHB) as well as lower cost of capital assumptions arising from the low-interest rate environment.
MQ Research upgrades aggregate sector earnings by +14%/+8% for FY20/21. Incremental provision downgrades were far outweighed by better non-interest income assumptions from trading in FY20E, as well as quicker net interest margin recovery. MQ Research also removes a -25bps overnight policy rate (OPR) cut from its assumptions (previously assumed -150bps cuts in FY20) and lowered costs in FY20/21.
MQ Research expects the market to look past the short-term volatility to banks earnings, and focus on business-as-usual ROEs in a post-COVID world. While MQ Research expects the lower interest rate and lower growth environment will trim ROEs, it has also driven down the cost of capital substantially. See MQ Research’s article on Malaysia Strategy as summarized in the daily highlights dated 7 December 2020.
Source: Macquarie Research - 11 Dec 2020