Lim’s calls to relax lending guidelines are weighing on lenders’ financing margins and asset quality
by NG MIN SHEN / pic by TMR FILE PIX
BANKS could be under pressure in the very near future, as a potential cut in lending rates and calls from the finance minister to relax loan guidelines are weighing on lenders’ financing margins and asset quality.
The Kuala Lumpur Finance Index closed at 17,174.77 last Friday, down 1.72% from 17,476 last Tuesday — the day Finance Minister Lim Guan Eng called on banks to relax lending guidelines.
Most major banks also saw significant declines in their share prices from Tuesday to Friday last week.
Malayan Banking Bhd — the largest public-listed firm on Bursa Malaysia — lost 2%, while Public Bank Bhd — the second-biggest bank by market value — fell 2.53%.
CIMB Group Holdings Bhd shed 2.56% and RHB Bank Bhd slipped 1.38%. Hong Leong Bank Bhd, AMMB Holdings Bhd (AmBank) and Affin Bank Bhd fell 1.73%, 1.53% and 2.18% respectively, while Alliance Bank Bhd was unchanged.
“To some extent, the drop in banks’ share prices can be construed as a knee-jerk reaction. (But) at the current juncture, the prospects for the banking sector look increasingly challenging,” Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid told The Malaysian Reserve (TMR).
Lim last week urged banks to be more flexible in their lending arrangements, as many consumers have complained of difficulties in obtaining financing.
Lim said banks should be more lenient in their lending since the government does not impose windfall taxes, although they continue to record huge profits year after year.
“This would have an impact on risk appetite and loan-loss provision. In addition, the competition for lending deposits are also likely to intensify, leading to narrower net interest margins,” Mohd Afzanizam cautioned.
Any negative surprise from the policy front would, therefore, accentuate the fear factor for the sector.
“There is a possibility of a cut in the Overnight Policy Rate (OPR) as there is a strong case to support the economy via monetary easing,” Mohd Afzanizam added.
Industry analysts and economists of late have noted that Bank Negara Malaysia (BNM) could well slash the OPR this year, in line with monetary policy easing on the part of most central banks worldwide.
Kenanga Investment Bank Bhd (Kenanga IB) said in a note last week that, given the US Federal Reserve’s rising caution on growth and dovish monetary stance, central banks globally are beginning to tilt their monetary policy towards a more neutral position or even towards easing.
This provides more room for BNM to adjust its short-term benchmark interest rates and the OPR lower this year, with further impetus from any slowing in domestic economic indicators, although Kenanga IB is maintaining its call for the OPR to remain unchanged for now.
A reduction in the OPR would impact banks, as the interest rate at which one bank lends to another is determined by the OPR.
TMR reported recently that the top six Malaysian banks lost a collective RM5.24 billion in market capitalisation last Thursday following the finance minister’s remarks, with
Public Bank’s, Hong Leong’s and AmBank’s share prices taking the hardest hits.
Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew had said the resultant sell-off from the windfall tax threat was a short-term reaction and is unlikely to persist further.
He added that Lim’s call for banks to accelerate lending activities could be due to the dip in housing loan approvals and the government’s Home Ownership Campaign 2019.
However, forcing banks to increase financing for residential purchases could lead to over-lending and place housing affordability under pressure again, Pong said.
Recall that the 2008 financial crisis was triggered by speculative financial market activity focused especially on housing transactions combined with cheap credit, particularly in developed markets.
The bubble came crashing down when global energy prices pushed inflation higher, leaving buyers unable to repay housing debts and a sharp drop in property prices that in turn dragged the values of banks’ assets.
Since then, banks have tightened lending guidelines and worked to improve asset quality as buffers against financial shocks, such as a global recession.
Notably, the US Treasury yield curve also inverted last Friday for the first time since the last financial crisis. A Treasury yield curve inversion is seen as a reliable omen of recession in the US within two years.
A jump in buying boosted the 10-year yields to a 14-month low of 2.416%, eliminating the gap between the 10-year and the three-month yields.