CGC-CIMB upgrades banks from Neutral to Overweight as it expects net profit growth to recover in 2021F to 14.7% (vs. -18.7% in 2020F).
- Banks’ valuations are attractive, at CY21F P/E of 10.5 times and CY20F price-to-book value (P/BV) of one time (all-time low).
- Stock picks for the sector are Public Bank and Hong Leong Bank (strong asset qualities), RHB (higher fee income growth), and AMMB (CY21F P/E of 6.4 times).
- YTD underperformance of the KL Finance index against KLCI of 15%. The CY21F P/E valuation for banks is attractive at only 10.5 times, the lowest since Feb 2013.
- Project banks’ net profit to grow 14.7% in 2021F vs. -18.7% in 2020, to be driven by the following:
(1) bottoming of the overnight policy rate (OPR) which would lead to a stabilisation of net interest margin (NIM),
(2) declining loan loss provisioning (LLP) in 2021F as provisions due to Covd-19 would have been mostly captured in 2020F, and
(3) a recovery in loan growth driven by 7.5% GDP growth in 2021F, ” it said.
- Downside risk for banks is limited as the sector is trading at CY20F P/BV of only one time, which is an all-time low since it first compiled the information in 2000), and offers dividend yield of 4.8% for CY21F.
- In 2020, banks’ earnings are being dented by modification loss (ML) arising from the loan moratorium offered for fixed-rate loans, lower NIM due to the 125bp cut in OPR, and higher LLP due to hefty pre-emptive provisioning for Covid-19, arising from 4% contraction in 2020F GDP.
- Key earnings drivers in 2021F are
(1) a 3.7% increase in net interest income (vs. a decline of 6.7% in 2020F) and
(2) a 23.4% drop in LLP (vs. an increase of 86.9% in 2020F).
- Expect banks’ dividend yield to rise from 3.2% in 2020F to 4.8% in 2021F.
- Other catalysts that could boost banks' earnings are stronger loan growth, sooner-than-expected hike in OPR, lower-than-expected provisioning due to stronger-than-expected economic recovery, and subsiding political risks.
- Big-capped banks with strong asset qualities are likely to lead the re-rating of the banking sector as investors rotate into sectors deemed likely to benefit from projected economic recovery in 2021F.
