SINGAPORE (June 12): Regionally, Asean banks have rallied 25-56% from their March lows. But Maybank Kim Eng Research is advising investors to remain cautious nonetheless.
In a recent report, analyst Thilan Wickramasinghe says FY2020-21 earnings for these banks have been downgraded across almost all of the brokerage’s coverage universe.
“Subsequent quarters bearing the full brunt of Covid-19 lockdowns may be worse. As a result, expect rising risks of further earnings per share (EPS) downgrades,” says Wickramasinghe.
“Of course, the sector is facing this crisis with stronger capital, provisions, which should provide some downside support,” he adds.
Segmentally, Wickramasinghe notes that all Asean banks, with the exception of Indonesia and Thailand, saw earnings cuts following 1Q2020. This was despite a majority of banks booking EPS that were in line with or ahead of expectations.
1Q2020 also saw credit charges increase 1.1 to 3.3 times compared to 2017-19 averages, with Singapore, Malaysia and Philippines coming in at the higher end of the range.
Non-performing loans (NPLs) in Singapore and Malaysia increased only “marginally”, reflecting higher cautionary provisioning. On the flipside, Wickramasinghe observes that NPLs saw material growth in Philippines and Indonesia.
“We believe the post-current EPS cuts will be a weak anchor, as the coming quarters will show the brunt of lockdown impact, especially in countries with weaker stimulus and pandemic management measures,” he says.
In addition, Wickramasinghe cautions that banks across the region remain “operationally mixed” amid the pandemic. With the exception of Malaysia, Indonesia and Vietnam, loan growth in 1Q2020 picked up pace from the previous quarter.
“This is likely driven by corporates bulking up liquidity ahead of lockdowns. Regional economies are forecasted for low growth or recessions,” says Wickramasinghe.
“Loan growth may somewhat be decoupled by this given government lending support schemes that are largely focused on keeping companies alive to ride out the pandemic,” he adds.
He is also bracing for net interest margins (NIMs) to see continued pressure given the falling interest rates in most countries except for the Philippines.
Wickramasinghe says that although Singapore may likely witness one of its strongest contractions in the region, this may not translate directly to its banking system.
Banks in Singapore’s open, trade-driven economy have “strengths” such as regional diversification, strong liquidity and strong capital reserves to thank. In addition, local banks are also set to benefit from “massive government stimulus” that have been transmitted through the banks, which might also provide upside.
However, Wickramasinghe says the sector’s NPLs are set to double in next three years to 3%, and credit charges should double year-on-year in 2020 and remain high till 2022.
Amid the uncertainty, Wickramasinghe is advising investors to look at defensive plays in countries with strong stimulus measures and quality balance sheets. For Singapore, the brokerage has identified UOB as its top sector pick.
Maybank is reiterating its “netural” call on the Asean banking sector, and has a “buy” call on UOB with a target price of $22.42.
As at 3.21pm, shares in UOB are trading 52 cents lower, or 2.31% down, at $22.02.
