With many greatly anticipating a return to normalcy in 2021, the banking sector which closely follows the economic growth of the country has also recovered in their equity prices. In this article, we look to share what we think of the sector going ahead.
During the height of the pandemic in the second quarter (2Q) of 2020, investors’ interest in the local banks was thrown aside in favor of the shinier tech and healthcare sector. During our previous update in mid-2020, we have called for a relook into the industry.
Investors who have followed our call would have benefited as the narrative for an economic recovery turns for the better, benefiting economy-linked stocks such as the financial sector.
As a result, the financial sector, as gauged by the Bursa Malaysia Financial Index has regained its pre-Covid-19 level. Given that the banking industry holds a significant weightage (more than 90 per cent) in the finance index, we look to focus more on this industry.
The Bursa Malaysia Financial Index has regained its pre-Covid level.
NIM has stabilised, could increase going ahead
The series of liquidity injection via cutting Malaysia’s Overnight Policy Rate (OPR) by Bank Negara Malaysia (BNM) throughout 2020 has been a bane to the banking sector’s NIM.
A rapid decrease in OPR typically will pressure bank’s NIM as they are paying off the higher previously-locked-in fixed deposit percentage while having to invest in the current low-yield environment.
However, being more than a year into the pandemic, it is reasonable to assume that the NIM has stabilised as deposits in the banks have mostly been adjusted to the lower rates. With a light at the end of the tunnel, the OPR is expected to remain at this current level at least for the rest of the year with no rate cuts expected which could mean that NIM has probably found a floor.
Should things turn for the better in the years ahead, BNM could look to raise the OPR which ultimately would be beneficial to the bank’s NIM.
With banks offering low fixed deposit rates, the public appears to prefer holding cash for liquidity in light of pandemic challenges. The additional support provided by the Malaysian government via fiscal stimulus and retirement funds withdrawals has also caused savings as a percentage to total deposits to rise.
Such a scenario is beneficial for banks as savings deposit receives even lower percentage than its fixed deposit counterpart, thus reducing the cost to banks even further.
Demand for loans supported by high ticket items
Over the course of 2020, total loans applied have declined by 6.2 per cent year-on-year. The main contributor to the year’s decrease in loan applied is the purchase of non-residential property, offset by an increase in transport vehicle, residential property, and working capital uses.
These three segments represent the majority of total loans applied at 10, 32.3 and 25.9 per cent respectively, totaling nearly 70 per cent as of 4Q20. Historically they also constituted the majority of total loans applied, adding up to more than an average figure of 60 per cent.
Going forward, we expect these segments to remain as the main pillar to total loans applied. Coupled with additional candies provided such as the vehicle sales tax exemption or initiatives such as the Home Ownership Campaign, the demand for such high-ticket items is likely to continue.
In addition, with the economy beginning to resemble pre-covid conditions, corporations are more likely to spend more on capital expenditure which will contribute to overall figures in the years ahead.
OPR movement expected to be benign in 2021.
Exits from foreigners likely to slow down
Foreigners have been known to sell local equity assets at a frantic pace, cumulatively discarding nearly US$6 billion worth of assets throughout 2020. With some form of recovery expected in the months ahead, investors are much more willing to invest in emerging markets such as Malaysia.
This interest has resulted in a cooling of the selloff, with 2021 even registering positive inflows. While cumulatively foreign flow is still at a deficit since the pandemic began, it is reasonable to expect the worst has passed.
Looking towards some of the largest banks in Malaysia, foreign shareholding appears to be at a five-year low. Foreigners typically have a higher interest in the emerging market’s financial sector as a significant portion of the country’s equity market is mainly in the financials, as well as the sector is generally seen to track the country’s economic growth.
This could present itself to be a supporting factor going ahead should local banks regain their luster among foreign investors. We are cognisant that the local political uncertainty could deter some from venturing into local banks, thus investors may want to consider minimise such risk by leveraging on the expertise of professionals to sieve out quality companies.
Consumers appear to prioritize savings.
Takeaway
All in all, the situation for the local financial sector appears to turn for the better. NIM compression that has haunted the sector is likely to stop, bolstered by decent loan demand amidst the steady interest rate expectation.
Foreigners have also moderated their selling of financial assets, with some signs of recovery in early 2021. Most importantly, the financial sector boasts a strong balance sheet to be able to weather further uncertainties. Such a series of factors is also coupled with the attractive valuations, turning this sector to be one to consider.
The post Malaysian financial sector still has gas in the tank appeared first on Borneo Post Online.