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PETALING JAYA: Following in the wake of the outbreak of Covid-19, Malaysian banks are sitting on extra cash in anticipation of pandemic-related loan losses.
This robust provision, UOB Kay Hian (UOBKH) Research said, can potentially be utilised for any asset quality deterioration caused by the current inflationary environment.
“We estimate that the sector has built up an average loan-loss coverage ratio of 275% on vulnerable loans.
“This provides potential earnings tailwinds in the form of potential writebacks in 2023 and beyond, which we have yet to factor in,” the research firm said in a note to clients.
It said banks’ asset quality has been holding up stronger than expected.
“Overall sector loans under repayment assistance have declined to 6% of overall banks’ aggregate gross loans as at end-May 2022 from a peak of 28% in Dec 2021, with the reopening of the economy and the gradual unwinding of the repayment assistance programme from Jan 1, 2022 onwards,” it added.
The research firm expects the level of repayment assistance to continue to decline in the months ahead as 60% of consumer loans under repayment assistance belong to the less vulnerable T20 income group.,
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“Assuming the entire T20 consumer income group were to resume repayment by the third quarter of 2022, we estimate that the overall level of loans under repayment assistance will decline further to 4% of total sector loans,” it said.
As such, UOBKH Research believes that the market should not be overly concerned about any upside surprises in banks’ net credit cost amid the current inflationary headwinds.
“Even if banks were to write back half of our assessed excess management overlays to 2023 earnings, we estimate that this could give rise to a 10% enhancement to our 2023 sector earnings forecast,” it said.
Reiterating its previous call, UOBKH Research said the current share price weakness of banking stocks is an opportunity to accumulate as the risk to reward is turning increasingly favourable.
As for stock picks in the sector, the approach it advocates is defensive and balanced, given the pockets of concerns such as the impact of declining current account-savings accounts mix, which could cap the full upside of net interest margin expansion from rising overnight policy rate and inflationary pressures on asset quality.
The research firm’s top sector pick is Hong Leong Bank Bhd.
It likes the stock for a couple of reasons. One is the banking group’s low loans-to-deposit ratio, which makes it less susceptible to deposit competition given scope for asset-liability optimisation.