Asean banks' asset quality risks still high, green shoots muted: Maybank KE

Singapore

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 stay muted.

"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 "buy" ideas for the region - taking into account diversification, capital levels and structural growth - are Singapore's DBS, Malaysia's Hong Leong Bank and Vietnam's Techcombank. On the other hand, MKE has a "sell" rating on Indonesia's Bank Central Asia, Bank Rakyat Indonesia and Thailand's Kasikornbank, given their "elevated provisioning risks and valuations".

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 loan moratoriums and support measures are 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 - not recognised as NPLs - surged 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.

Moreover, operational green shoots are under pressure with borders still largely closed and risks of domestic "mini lockdowns" causing disruption.

Declines in net interest income across Asean increased pace in Q2 2020, primarily driven by falling net interest margins (NIMs). Loan growth also slowed during the quarter, although there are no signs of lending contraction, the research team said.

"Continued border closures and potential mini-lockdowns as responses to renewed Covid-19 infection may keep operational recovery muted," MKE noted. However, the exception may lie in banks that are exposed to North Asia and in those with large wealth management franchises, in the analysts' view.

In Singapore, massive government stimulus may cap NPL growth in the near term for lenders, but there are still significant risks as this support begins to retire, MKE said. The sector's NPLs are set to nearly double by 2021 while credit charges nearly triple, it added.

As for Indonesia, NIM compression is expected to continue in H2 2020 due to the high amount of loan restructuring, the analysts said. Their top picks in the country are Bank Negara Indonesia and Bank Pembangunan Daerah Jawa Barat dan Banten.

In the Philippines, given the NPL uncertainty and NIM pressure, MKE prefers banks with relatively more defensive loan portfolios and a greater ability to preserve NIMs. It favours BDO Unibank and Bank of the Philippine Islands.

Thailand, meanwhile, has seen a 10 per cent quarter-on-quarter rise in gross NPLs in Q2 this year, but MKE expects more in the coming quarters especially with the Bank of Thailand's mandated six-month moratorium ending in early Q4. The analysts like Bangkok Bank and Tisco Financial.