AmInvestment Bank Research has predicted that the loan growth for the domestic banking industry will settle at 4% to 5% in 2021, with a faster rate of increase in household and non-household loans. This is supported by a gross domestic product (GDP) expansion of 6.5% to 7%, with private spending and trade activities improving.
The research house also said that the provisioning for loan losses for the banking sector will likely be lower this year compared to the last. This is because banks will continue to front-load their provisions in 2020, conservatively booking more provisions as management overlays in the remaining months of the fourth quarter of last year (4Q20). In other words, they will endeavour to assign most of their loan losses to the remaining months of 4Q20 for a lighter load in 2021.
“For 2021, we are assuming a lower credit cost of 47 basis points (bps) versus 55 bps in 2020. We expect the low interest rate environment to persist moving into 2021 with no further overnight policy rate (OPR) reductions. This will be supportive of the economic recovery,” AmInvestment further noted.
With no further rate cuts expected this year, the research house went on to predict that the interest margins for banks will continue to recover from 4Q2020 into the first quarter of 2021 (1Q21) as more people continue to repay their debts. As such, the net interest margin (NIM) in 2021 is expected to be stable, or maybe even improve slightly.
With all the above factors combined – along with controlled operating expenses – AmInvestment said that the core earnings of the banking sector will likely recover and grow by 16.1% in 2021. Last year, the banking sector suffered a 22.2% drop in its core earnings due to various reasons, including changes to macroeconomic variables.
In terms of the sector’s return on equity, the research house further foresees an improvement of 0.3% from last year, to 8.9% in 2021. However, the asset quality for banks will still face some weaknesses, such as the risk of impaired loans, although the ongoing targeted payment assistance programme should help to lower these risks until the end of June.
“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,” explained AmInvestment.