Potential catalyst from provision write-back
? Malaysian banks’ management overlay amounted to an estimated RM6.84bn at end-Sep 21 (35% of their total gross impaired loans).
? Based on our analysis, a write-back of every 10% of management overlay would lift our projected FY23F net profit for banks by circa 2%.
? Possible provision write-back as well as OPR hike and a drop in LLP are potential re-rating catalysts that underpin our Overweight call for banks.
A prudent move to ramp up pre-emptive provisions for Covid-19
Since 2Q20, Malaysian banks have been actively providing pre-emptive provisions (or management overlay) for the credit risks from the Covid-19 outbreak. We estimate that the management overlay totalled RM6.84bn at end-Sep 21 for Malaysian banks under our coverage, accounting for 35% of the banks’ total gross impaired loan (GIL). This should provide a strong buffer against any increase in GIL in 2022F, in our view. Although the management overlay only accounted for an estimated 2.4% of the total loans under repayment assistance, we are not overly concerned about this as we think that only a small percentage of these loans would eventually turn into GIL, premised on the improvements in loan delinquency rate following the reopening of economy and continuous repayment assistance offered by banks to their borrowers.
Provision write-back could lift our FY23F net profit forecast by 2%
We believe provisions could be written back in 2023F, at the earliest, if the GIL ratio does not spike in 2022F. We estimate that every 10% write-back in management overlay would lift our FY23F net profit forecast for Malaysian banks by circa 2%. The impact would range from 1.5% (the lowest) for Public Bank Bhd (PBB) (due to its strongest net profit base) to 5.4% (the highest) for Alliance Bank (due to highest the management overlay ratio of 71.2% over its FY23F net profit).
Reiterate Overweight on banks
We see the potential write-back of management overlay as a new earnings catalyst for banks from 2023F. This along with the expected hike in overnight policy rate (OPR) and the downward trend in loan loss provisioning (LLP) could act as potential re-rating catalysts that underpin our Overweight call for the banking sector. Potential downside risks include a wider-than-expected increase in GIL ratio and no OPR hike in 2022F. Our top picks for the sector are Hong Leong Bank, PBB and RHB Bank.
AMMB is our pick for potential write-back in management overlay
Based on our analysis, Alliance Bank and AMMB would be the biggest beneficiaries of the potential write-back of management overlay (a positive impact of 5.4% and 4.2%, respectively, on their FY23F net profit from every 10% provision write-back). However, AMMB is our top pick for write-back play as it is trading at a lower CY22F P/E valuation of 7.1x and has better asset quality (reflected by its lower GIL ratio of 1.44% vs. Alliance Bank’s 2.32% at end-Sep 21).