Finance

Broker’s take: Maybank downgrades Asean banks to negative; DBS among top picks

Mon, Sep 14, 2020 – 11:54 AM

MAYBANK Kim Eng (MKE) has downgraded its sector outlook on Asean banks to negative as their asset quality risks remain high while operational recovery may be limited.

"As moratoriums begin to unwind, starting from Q3 in Malaysia, we expect additional asset quality pressures to surface," the research team wrote in a report on Friday night.

In particular, banks that have a domestic focus may see higher operational pressures, especially if economic activities fail to pick up pace.

MKE's top picks for the region – taking into account diversification, capital levels and structural growth – are Singapore's DBS with a target price (TP) of S$22.90, Malaysia's Hong Leong Bank with a TP of RM16.70, and Vietnam's Techcombank with a 27,400 dong TP.

On the other hand, MKE has a "sell" rating on Indonesia's Bank Central Asia with a TP of 22,000 rupiah, Bank Rakyat Indonesia with a 2,900 rupiah TP, and Thailand's Kasikornbank with a TP of 80 baht, given their "elevated provisioning risks and valuations".

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For the second quarter, Asean banks' earnings momentum remained largely negative, quarter on quarter, with those in Indonesia, the Philippines and Thailand "worsening substantially", the analysts wrote.

There may be dislocations between real asset quality and recognition of non-performing loans (NPLs), seeing as there are various forms of loan moratoriums and support measures in play, the analysts said, adding that banks in the region continue to face risks of higher credit charges.

Between Q4 2019 and Q2 2020, gross NPLs had increased substantially by around 23-60 basis points for lenders in Indonesia, the Philippines and Thailand. But even that may not reflect the full impact, considering the moratoriums in place.

For instance, Indonesia's percentage of restructured loans – which are not recognised as NPLs – shot up to 17.2 per cent in Q2 2020, from 4.8 per cent in Q1 2020.

Credit charges recorded by banks in Indonesia, Thailand, Singapore and Malaysia for the first half of this year were all higher than the past three-year average, said MKE. "As a result, we believe the risks of further credit charge hikes remain on the upside for several key Asean markets," it added.

"Indeed, following Q2 2020, there were earnings cuts to nearly a quarter of our regional coverage, despite 80 per cent reporting better-to-in-line profit after tax. This trend is likely to persist in the near term," the analysts wrote.

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