Uptrend: Banks along the Jamek Mosque in KL. Since end-October, banking stocks have rallied by more than 20%. — Bloomberg PETALING JAYA: The reopening of the domestic economy and the potential mass vaccine rollout by various countries have seen investors shifting to more cyclical sectors like banks – the proxy to economic growth. Since end-October, banking stocks have rallied by more than 20% versus the FBM KLCI’s 11% rise, largely on optimism that positive news on Covid-19 vaccine tests by pharmaceutical companies will blunt the pandemic, and in turn see demand for loans pick up on improved macroeconomic prospects next year. On the back of this, some analysts have recently upgraded the sector rating to overweight from neutral, notwithstanding some concerns on asset quality. In a banking sector outlook for 2021, RHB Research said sector fundamentals were recovering and believes the share price outperformance will sustain in 2021, as investors continue to rotate more into cyclical sectors like banks. After a challenging 2020 because of Covid-19 that saw banks’ bottomline being impacted due to significantly higher provisions (albeit mostly pre-emptive in nature) and modification losses arising from the six-month blanket moratorium, it forecasts sector earnings recovering 27% year-on-year. That said, the research firm contends that downside risks linger. “With the time lag between vaccine approvals and mass vaccination, sporadic resurgence of Covid-19 infections and lockdowns can still happen. These will, in turn, in our view, weigh on sector earnings via higher credit costs and lower topline growth, ” it said. However, it thinks investors should look past these short-term “speed bumps on the recovery road” and focus on the better sector outlook. According to RHB, the true picture on asset quality will start to show in mid-2021 upon the expiry of the three-month extended non-repayment period for targeted borrowers. It said while gross impaired loans are expected to rise, it does not foresee any cliff effect in asset quality based on the preliminary results seen during the months following the blanket moratorium that ended in September. Additionally, troubled borrowers would receive various degrees of relief with the targeted repayment assistance programme in place. TA Research, which also is overweight on the sector, estimates the banking system’s loan growth to increase by around 6% in 2021 versus its forecast of 3.8% in 2020. Demand for loans is expected to be fuelled by both the consumer and business segments, which it projects would rise by 6.2% and 5.8% respectively next year. However, it pointed out that on the whole, banks are banks still exercising caution, dampening prospects for even stronger loan growth. “Although we note that demand for loans, as indicated by applications, appears to have improved, total loans approved were more muted as banks continue to exercise caution due to uncertainties and concerns over asset quality. “In October, total loans approved rose by 0.8% year-on-year (y-o-y), but contracted by 2.1% month-on-month (m-o-m). Compared to December 2019, the approval rates for consumer and business loans had fallen to 44.1% and 45.5% from 47.1% and 60.7%. It observed that the velocity of money – the rate money is exchanged in an economy – had declined to a new low of 0.59 times in the second quarter (Q2), as the country’s GDP plunged to a contraction during the quarter. “While the velocity of money has picked up in Q3, in tandem with the rise in economic activities, it is still very much below the 10-year average of 0.82 times. This, we believe, suggests that banks are generally still unwilling to lend, ” it said. In terms of valuations, it said the sector is trading at an attractive price-to-book value, which has sunk to lows of less than one times. This is a reflection of a new cycle of lower return on equity for the industry, plus the fundamental shifts in the terms of the banks’ operating environment.
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