KUALA LUMPUR, July 22 — AmInvestment Bank Bhd (AmInvest) has maintained its 'Overweight' rating on the banking sector, as anticipation of improvement in underlying interest margins will drive banks’ core net interest income (NII) higher.

The investment bank also expects stronger fees and commissions for non-interest income (NOII) while operating expenses would remain tightly managed resulting in positive JAWs ratio, a measure that demonstrates the extent to which an income growth rate exceeds its expenses growth rate.

In a sector report today, AmInvest said the banking sector is expected to make lower provisions for this year compared to 2020 with a credit cost of 50 basis points (bps) (2020: 60bps) as the provision buffers built up by banks since last year are largely unutilised and able to cushion against the impact of the latest lockdown.

"On the latest six-month moratorium, it is likely to still see banks conservatively topping up provisions, an additional overlay. Nevertheless, we do not expect these additional overlays to be a substantial amount unlike that seen in 2020.

"This is on the expectation that the economy is anticipated to progress towards recovery with the gradual opening of more economic sectors after achieving herd immunity against Covid-19 through mass vaccination,” it noted.

It said modification loss for the latest moratorium is expected to be minimal and  manageable for banks and will be recognised in the third quarter of 2021 (Q3 2021) and to be much lower than the cumulative amount of about RM1.8 billion for banks seen in Q2 2020.

AmInvest said it is also keeping the industry loan growth projection of 4.0 to 5.0 per cent for 2021 while competition on deposits is expected to remain mild due to the strong current account saving account (CASA) growth which continues to be seen in the near term for the banking system.

For the sector top picks, the bank chose CIMB Group Holdings Bhd with fair value (FV) at RM5.60, RHB Bank Bhd (FV: RM6.90) and Malayan Banking Bhd (Maybank) (FV: RM10.40).

"We like CIMB, RHB and Maybank due to the expected improvement in core operating income coming from the gradual improvement in regional operations performance, progressive improvement in underlying net interest margins and provisions for loan losses.

"Earnings of these banks are expected to benefit from the improved performance of their Singapore operations which in 2020 were affected by provisions including overlays and specific provisions.

"Also, we continue to see compelling valuations for these stocks and strong capital positions, particularly the robust capital ratios of RHB Bank,” it added. — Bernama