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PETALING JAYA: Loan growth for the domestic banking industry is projected at 4-5% this year, with a faster pace of increase in household and non-household loans, supported by gross domestic product (GDP) expansion of 6.5–7% with improvements to private consumption and trade activities.

In a note, AmInvestment Bank Research (AmResearch) said it expects provisioning for loan losses for the sector to be lower in 2021 compared with 2020, with banks continuing to further front load their provisions in 2020, conservatively booking more provisions as management overlays in the remaining months of fourth-quarter 2020 (Q4’20).

“In 2021, we are assuming a lower credit cost of 47 basis points (bps) vs 55bps in 2020. We expect the low interest rate environment to persist moving into 2021 with no further Overnight Policy Rate reductions. This will be supportive of the economic recovery. We do not see the intensity of deposit competition picking up significantly in 2021,” it said.

It added that with no further rate cuts, interest margins of banks will continue to recover from the reprising of liabilities in Q4’20 and into Q1’21.

Overall, the sector’s net interest margin (NIM) in 2021 is anticipated to be stable and even improve slightly compared to 2020.

The sector’s core earnings are expected to recover and grow by 16.1% in 2021 based on higher total income from a pick-up in pace of loan growth, stable to slightly improved NIM, controlled operating expenses and lower provisions.

This is after an expected sharp 22.2% contraction in 2020 earnings attributed to higher provisions which have been conservatively booked as management overlay and from changes to macroeconomic variables.

It also expects the sector’s return on equity to improve to 8.9% in 2021 vs 8.6% in 2020.

However, it still expects some weakness in asset quality for banks in 2021, though the targeted payment assistance rolled out is expected to keep a lid on the sector’s asset quality or gross impaired loans ratio until June 30.

“Concerns on asset quality will be mitigated by the likelihood of the distribution of Covid-19 vaccines in 2021 and the fact that banks have already made much of the provisions upfront in 2020 against any potential future credit losses.”

Overall, the research house is retaining its overweight call on the banking sector, with buy calls on Hong Leong Bank, Maybank and RHB Bank.

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