PETALING JAYA: Although a reduction in the statutory reserve requirement (SRR) ratio is often perceived as a measure to stimulate bank lending and lower banks’ funding cost, Affin Hwang Capital believes that the impact from the 1% SRR cut last week will not be immediately felt due to the muted global economic outlook.
The prevailing domestic sentiment is shrouded with fears of an economic recession resulting from a prolonged Covid-19 pandemic.
“Nonetheless, the cut in the SRR ratio overall is marginally positive for the banks’ earnings (+1.5% to +3.9%) through additional lending activities or investments,” the research house said in a report.
Affin Hwang maintained its “underweight” call on the sector, noting that earnings growth remains unexciting while investor sentiment is highly risk-averse.
“We foresee a contraction in sector core earnings per share growth of 11.6% year-on-year (yoy) in 2020, and a slightly modest growth rate of 1.4% yoy in 2021.”
Affin Hwang opined that Bank Negara Malaysia (BNM) may lower its SRR further from the current 2%, to inject more liquidity into the banking system and may potentially undertake another 25bps cut in the Overnight Policy Rate (OPR) in May in view of the negative reper-cussions from Covid-19 outbreak on the domestic economy.
On stock picks, Affin Hwang remains selective and prefers ELK-Desa Resources Bhd due to its attractive yields and resilient business in the auto-financing of mass-market used-cars.
Meanwhile, AllianceDBS Research said BNM’s actions are likely aimed at spurring additional lending and ultimately economic growth but opined that loans growth will still hover at measured levels, dragged by muted credit demand as well as self-preservation among the corporates amid the fallout of the outbreak.
“At this juncture it is still too early to tell the adverse impact of Covid-19, though the current tally indicates potential exposures at up to 3% of total loans with applications for moratoriums and reschedulling exercises coming in.”
It added that the higher possibility of a rate cut will introduce an additional short-term squeeze on the banking sector’s revenue momentum. Based on its sensitivity, an additional 25bps rate cut would shave banking sector earnings by 2% on a steady state basis.
“Note that we had previously cut our FY20-21 earnings by 3% after imputing the 25bps rate cut in March 2020. Though the revenue loss may be cushioned by better treasury income arising from concurrently lower bond yields, the magnitude would likely be limited by an upward spike last week (week of March 16) due to additional headwinds of falling oil prices.”
AllianceDBS said banking sector valuations have continued to fall in line with the market sell-off and banks are now trading at less than 0.9 time of 2020 book value.
“During this period of uncertainty with multiple headwinds buffeting the operating environment, we prefer banks with strong asset quality and resilient earnings bases, notably Hong Leong Bank Bhd and Public Bank Bhd. We note that both banks also have limited exposure to the O&G sector.”
