KUALA LUMPUR: Malaysia's banking sector is set to rebound firmly with estimated net profit growth of about 20 per cent in 2021, according to analysts.
They said the sector would be a direct beneficiary of the country's expected solid economic recovery next year backed by the potential availability of the Covid-19 vaccines by September 2021.
OANDA senior market analyst for Asia Pacific Jeffrey Halley said the banking sector should outperform in 2021 if the economy recovers as expected as the world moves past Covid-19.
"Unloved cyclical sectors are likely to outperform of which banking is one. A recovery in Malaysia's cyclical sectors also reduces the likelihood of a sharp increase in bad loan provisioning, which will be another positive for the sector," he told the New Straits Times.
Halley said there was no evidence yet that Malaysia's banking system was under stress from a huge increase in bad loan provisioning.
"Those fears will ease further in 2021. As far as interest margin compression goes, the simple way it is addressed is by lowering the deposit rates on savings. Interest rates are already very low in Malaysia, so the worst of any interest margin compression is already behind the sector," he added.
Halley said Bank Negara Malaysia would have scope to lower rates further than 1.75 per cent in 2021 if needed.
"The major factors that may prompt it to do if the ringgit appreciation we are likely to see next year occurs at a level faster than the central bank desires."
Secondly, the expected slower progressing economic recovery would likely prompt Bank Negara to cut rates more aggressively, he added.
CGS-CIMB analyst Winson Ng said the banks' recovery would be underpinned by a projected 30.2 per cent drop in loan loss provisioning (LLP) and a turnaround in net interest income (NII) growth from a decline of 5.4 per cent in 2020 to an increase of 4.7 per cent in 2021.
"We remain overweight on banks, predicated on the potential re-rating catalyst from a recovery in banks' net profit growth given the better outlook for net interest margins (NIMs) and LLP.
"We also expect the sectors' dividend yield to improve from 2.5 per cent in 2020 to 3.9 per cent in 2021," he said in a report.
Ng said banks' NIMs would likely recover on the back of the expectation of stable Overnight Policy Rate (OPR) and the non-recurrence of the modification loss.
Banks' non-NII growth has begun to pick up with a 9.6 per cent growth year-on-year (YoY) in the third quarter (Q3) of 2020, mainly driven by investment and brokerage income lifted by a surge in the trading value in the equity market.
Ng said the end of the the blanket loan moratorium on September 30 this year had affected banks' asset quality. Hence, there could be slippage in banks' asset qualities in Q4 of 2020.
The industry's gross impaired loan (GIL) ratio rose from an all-time low of 1.38 per cent at end-September 2020 to 1.43 per cent at end-October of 2020.
"We expect the uptrend in the industry's GIL ratio to continue, with a projected GIL ratio of 1.7 per cent at end-December of 2020 and 2.0 per cent at end-December 2021.
"However, we do not anticipate a spike in banks' GIL ratio due to the targeted repayment assistance to borrowers with the expectation an economic recovery with gross domestic product (GDP) growth of 7.5 per cent in 2021."
Ng added that the better economic climate in 2021 would lead to the creation of jobs and improvement in income for individuals and businesses. Hence this would help to alleviate the risks of a spike in the industry's GIL ratio.
CGS-CIMB forecasts a slowdown in banks' loan growth from 4.4 per cent at end-September 20 to about 4.0 per cent at end-December 2020.
"However, we project stronger loan growth of 4.0 per cent to 5.0 per cent for banks in 2021, premised on the expected economic recovery, with GDP growth of 7.5 per cent.
Ng said the key development affecting banks was the end of the blanket loan moratorium as it had shielded banks' loan growth and asset quality in Q2 and Q3 from the negative impact of the Covid-19 pandemic as more than 50 per cent (estimate) of the borrowers did not have to repay their loans during the period.
Potential downside risks for local banks include additional OPR cuts in 2021 and a protracted economic downturn extending into next year as banks might have to grapple with a potential slowdown in loan growth and a further increase in LLP.
MIDF Research head of research Imran Yusof said GIL was likely to increase in the coming month into Q1 of 2021 as the short-term negative impact from the Conditional Movement Control Order might come to the fore.
"We do not expect GIL ratio to breach 1.7 per cent level given the targeted loan moratorium and repayment assistance program. We believe banks will have sufficient coverage due to the build-up of coverage for loan losses," he said.
MIDF Research economics team has projected Malaysia's GDP to rebound to 7.0 per cent next year backed by the potential availability of the Covid-19 vaccine by Q3 of 2021.
"We expect the banking sector to be a direct beneficiary of this rebound. Hence, we foresee that provisions and loan impairments will start to taper by Q3 of 2021, better growth from NII coming from robust loans growth and low cost of fund, and operational expenditure continues to be well contained."
The firm expects banks' earnings under its coverage to expand 18.7 per cent in 2021 from the expected 24.4 per cent contraction in 2020.
"We expect loans demand to accelerate, leading to higher loans growth especially in the second half (2H) of 2021. Besides consumer loan, we expect businesses will also drive loans growth in 2021, to fund for the expected increase in business activities."
Hence, MIDF Research forecasts a 5.0 per cent YoY loans growth for 2021.
"Our optimism is premised on the recovery of the economy, made more certain with the availability of the vaccine in 2H of 2021.
"We expect credit cost to start normalising while income will stage a rebound. We maintain a positive recommendation for the banking sector. We recognise that there short-term pressure that banks will have overcome," Imran said.