Banks earnings are likely to remain uncertain and volatile this year with a combination of factors, analysts said.

This includes Day One modification losses and rising credit cost, they said, ading that the recovery path was unlikely in thenear term.

Kenanga Research has reduced banks’ equity risk premium by 25 basis points (bps) for next year, saying updated guidance from banks had helped to provide some context to the outlook ahead, while recent earnings cuts had also aided in lowering some earnings risks.

However, it said the re-opening of the economy and significant cuts to policy rate had helped clear some overhang for the banking sector.

Its analyst Ahmad Ramzani Ramli maintains “neutral” to local banks as they would be facing a tougher operating environment ahead with a solid balance sheet.

“We upgrade AMMB Holdings Bhd (AMMB) to ‘outperform’ from ”market outperform as it has been a laggard and valuations look cheap for financial year 2021 with price-earnings-ratio 7.3 times lower than smaller peers Affin Bank Bhd and Alliance Bank Malaysia Bhd.

“As such, AMMB could be an attractive catch-up play. For a more defensive tilt, we prefer Hong Leong Bank Bhd over Public Bank Bhd and add the stock to our “Outperform” list,” he said in a ‘report today.

Kenanga Research said banking stocks had enjoyed a catch-up rally last week, where the sector rose 10.5 per cent for the week compared to 5.6 per cent gain for the FBM KLCI.

Consequently, the sector is now up 23.9 per cent from its low in March (FBM KLCI: up 27.6 per cent) but on year-to-date basis, it is still down 11.6 per cent FBM KLCI: -2.0 per cent.

“We believe the recent rally was fuelled by a combination of liquidity, rotational play into cyclicals and possibly, more optimistic prospects ahead. We noted that other regional markets have also seen their banking stock prices pick-up,” it added.

Kenanga Research said some key observations for the trends between share price performance, price earnings (PE) and profitability included share prices bottomed out around three to six months ahead of earnings and strong PE multiple expansions subsequently as share prices reacted positively to improved earnings prospects.

Hong Leong Investment Bank Bhd (HLIB) analyst Chan Jit Hoong said net interest margin pressure might persist into following quarters given May’s 50 bps Overnight Policy Rate (OPR) cut and possibly another 25bps reduction in the second-half of the year.

“With the confluence of events from Covid-19 crisis and imminent recession, loans growth is expected to taper further. Besides, asset quality is poised to remain weak but it should not spiral out of control (at least till end September 2020).

“This is because Malaysian borrowers were granted six-month loans deferment while any restructuring and rescheduling (R&R) of loans affected by Covid-19 will not be tagged as impaired,” he said in a report.

The firm cut its earnings forecasts for CIMB Bank Bhd, Malayan Banking Bhd, Public Bank and RHB Bank Bhd due to two-year aggregate earnings negative of compound annual growth rate of 5.7 per cent.

“We believe recent sector rally was due to ample liquidity given the six-month loan moratorium, series of OPR cut, and low fixed deposit rates. In turn, this led to decade high retail participation and more generous valuations were accorded to stocks than usual, despite challenging outlook,” it said.