All banking stocks have rallied since early last month with Malayan Banking Bhd, Public Bank Bhd and CIMB Group Holdings Bhd up by over 20%, 36% and 42% respectively in nearly two months. PETALING JAYA: The banking sector is back on investors’ radar as the market sees a greater clarity on economic recovery and the roll-out of Covid-19 vaccines. All banking stocks have rallied since early last month with Malayan Banking Bhd, Public Bank Bhd and CIMB Group Holdings Bhd up by over 20%, 36% and 42% respectively in nearly two months. Analysts are optimistic on the sector’s outlook, with banks’ earnings projected to rebound significantly in 2021. According to RHB Research Institute, banks are expected to outperform the market next year. After dipping by an estimated 30% in 2020, the banking sector’s total net profits are forecast to rebound by 27% – although it would still be about 12% lower than the pre-Covid-19 level. “The uplift in earnings is mainly on the year-on-year lower (still somewhat elevated) credit cost, as we expect most banks to bring forward much of their respective provisions to 2020. “Asset quality will again be the focal point after months of delay caused by various debt repayment relief programmes, ” the research house said in an earlier note. Echoing a similar view, MIDF Research said questions on asset quality hang over the head of banks. Since the implementation of the blanket loan moratorium beginning in April, the banking system’s gross impaired loans (GIL) ratio had been on a downtrend. It reached its lowest of 1.38% as of September 2020, considering that delinquent loans were not classified as impaired during the loan moratorium period. “However, as we had expected, it had an uptick to 1.43% as at Oct 2020, the first month of the post blanket loan moratorium. “We expect that GIL may increase in the coming month into the first quarter of 2021 as the short term negative impact from the conditional movement control order might come to the fore. “Nevertheless, we do not expect the GIL ratio to breach 1.7% level given the targeted loan moratorium and repayment assistance programme. “Besides, we believe that banks will have sufficient coverage due to the build-up of coverage for loan losses, ” it said. MIDF Research expected loan demand to accelerate next year, leading to higher loans growth especially in the second half of 2021.The research house forecast a 5% year-on-year loans growth for the banking sector in 2021. Meanwhile, AmBank Research said the banking sector’s provisioning for loan losses would decline in 2021. It added that banks have continued to further front load their provisions in 2020, conservatively booking more provisions as management overlays in remaining months of the fourth quarter this year. “In 2021, we are assuming a lower credit cost of 47 basis points versus 55 basis points in 2020. “We expect the sector’s return on equity to improve to 8.9% in 2021 versus 8.6% in 2020, ” it said
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