Public Bank, Hong Leong Bank most defensive against any rise in gross impaired loans, says CGS-CIMB Research

PETALING JAYA: Public Bank Bhd and Hong Leong Bank Bhd have emerged as potentially the two most defensive against any increase in the industry’s gross impaired loans (GILs) in 2021 arising from the Covid-19 pandemic.

In a report, CGS CIMB Research said from its recent banking roadshow, it gathered that investors are still concerned about the potential rise in the industry’s gross impaired loans ratio in second-half 2021 once the targeted repayment assistance offered by banks expires in June 2021.

“Indeed, we also expect the banking industry’s gross impaired loans ratio to rise from 1.38% at end-Sep 2020 to 1.7% at end-Dec 2020 and 2% at end-Dec 2021. However, banks’ loan loss provisioning is projected by us to decline in 2021F as banks have frontloaded most of their loan loss provisioning in 2020.”

It opined that Public Bank and Hong Leong’s net profits will be the least impacted among their peers should the industry’s GIL ratio spike in 2021.

“We project an increase of 12.2% in Public Bank’s net profit in FY21 compared to an expected 20.3% drop in FY20. For Hong Leong Bank, we are forecasting a net profit growth of 6.1% in FY6/21F vs. a decline of 6.4% in FY6/20,” it said.

The research house said both banks occupied the top two positions in its rankings based on the five indicators, namely: the peak in gross impaired loans in the past 20 years, collateral coverage, loan loss coverage, total provision buffer coverage, and percentage of loan exposure to residential mortgages.

Public Bank and Hong Leong have the highest scores of 38 points and 37 points, respectively, under its scoring methodology, compared to the range of between 10 points and 24 points for other banks.

“Public Bank and Hong Leong have adequate provision buffers to offset additional provisions from a doubling of gross impaired loan ratios in 2021. Hence, should the industry’s gross impaired loan double in 2021, the negative impact from this on Public Bank’s and Hong Leong Bank’s FY21 net profits would be smallest compared to their peers, in our view.”

It also pointed out that Public Bank’s asset quality was the best among the local banks. Hong Leong Bank was a distant second, with a peak of 14.5% in GIL ratio.

Overall, CGS CIMB is maintaining its overweight rating on the banking sector despite the expected GIL rise.

“We advocate investors take positons in PBB and HLB, which are our top picks for the sector. We also have add calls on RHB Bank as we expect the new bancatakaful agreement to drive its fee income growth in FY21, and AMMB due to its attractive valuation of 7.1 times 21 price to earnings ratio,” CGS-CIMB said.