The move taken by Bank Negara Malaysia (BNM) to introduce an automatic moratorium on all loan repayments will help ease the burden of consumers and small businesses, largely due to the toll from COVID-19 and the Movement Control Order on the domestic and global economy.
Maybank Investment Bank (Maybank IB) said even though banks would continue to accrue interest on such loans while cash flows will be curtailed, the relaxation measures will provide offset.
In the meantime, it said in the near term, the exemption from setting aside credit costs against moratorium loans will ease the impact on banks’ profitability.
“The risk, however, is of kicking the problem down the road if the economy does not recover over the next six months and asset quality issues could be larger than envisaged should more borrowers default,” Maybank IB said in a note today.
Moreover, there is a risk that banks may be more reluctant to engage in lending operations, with the prevailing moratorium in place.
“We favour banks with strong asset quality and sufficient provisioning levels to buffer against the potential of defaults being larger than anticipated after the moratorium period. This includes Hong Leong Bank (HL Bank) and Public Bank,” said Maybank IB.
BNM has proposed an automatic moratorium on all loan repayments by individuals and small and medium enterprises for six months starting April 1, 2020. Banks are encouraged to facilitate moratoriums on corporate loans, and need not set aside provisions against such loans.
“Of the various measures to ease prudential buffers, the more meaningful one, in our view, is the reduction in regulatory reserves which could bolster banks’ Common Equity Tier 1 ratio by 0.6-0.7 percentage points, thus providing some level of comfort that dividend payouts could be sustained,” said Maybank IB.
On the flip side, loan loss coverage ratios will drop below 100 per cent for all banks but Public Bank (124 per cent) and HL Bank (103 per cent), without the buffer from regulatory reserves, it added.
Meanwhile, Public Investment Bank said the moves by BNM were necessary to stem potential asset quality issues which may have an even more negative impact on the sector and consequently, stock valuations.
“The sector is currently facing a triple threat of compressed margins (from possibly more overnight policy rate cuts), slower loan growth (from sluggish economic momentum) and weaker asset quality (through possible business shutdowns),” it said in a note today.
Public Investment Bank said earnings estimates were left unchanged at this juncture although it cautioned for 5.0 per cent-15 per cent cuts in view of further margin compression and weaker loan growth momentum.