Moratorium on debt repayment a bane for banks

The move by BNM is necessary to stem potential asset quality issues which may have an even more negative impact on the sector


THE move by Bank Negara Malaysia (BNM) to impose a six-month moratorium on loan and financing payments is putting the resilience of banking institutions to test, according to analysts.

While the slew of new measures announced by the central bank is to assist borrowers affected by the Covid-19 outbreak, it has also placed the banking sector earnings outlook under more pressure.

Public Investment Bank Bhd (PublicInvest) head of research Ching Weng Jin said the sector is currently facing a triple threat of compressed margins (from possibly more Overnight Policy Rate cuts), slower loans growth (from sluggish economic momentum) and weaker asset quality (through possible business shutdowns).

“On face value, the moves appear to be net negative to the sector given the lower interest income receipts for a period of six months.

“Nonetheless, the move by BNM is necessary to stem potential asset quality issues which may have an even more negative impact on the sector and consequently, stock valuations,” he said in a note yesterday.

Among the measures announced include an automatic six-month loan moratorium to all individual, and small and medium enterprise (SME) borrowers from April 1, 2020, excluding credit card balances which can be converted to term loans of not more than three years with interest cap of 13% per annum.

Corporate borrowers can request for the six-month loan moratorium to help preserve jobs.

Besides that, rescheduled and restructured loans need not be classified as credit-impaired and banks are allowed to drawdown a capital conservation buffer of 2.5%, operate liquidity coverage ratio (LCR) of below 100%, as well as reduce regulatory reserves to 0%.

The net stable funding ratio (NSFR) implementation will continue to be effective on July 1, but the minimum requirement is lowered to 80% from 100%.

Ching said bank shares faced the brunt of the recent selling pressure with some trending significantly lower to -2 standard deviations, below their long-term price-earnings averages.

“While we maintain our ‘Neutral’ stance on the sector given the lack of clarity on earnings prospects at this juncture, trading opportunities are attractive,” he said.

PublicInvest likes AMMB Holdings Bhd and CIMB Group Holdings Bhd for their earnings growth stories.

Affin Hwang Capital research analyst Tan Ei Leen also expects the impact of the new measures to be negative on banks, especially for the six-month period as it will put a strain on their liquidity and working capital, which is also needed to cover interest expense, overheads and for lending activities.

“Nonetheless, as a relief for banks, the NSFR, lowered to 80% and the LCR, below 100% for banks, could be relaxed.

“We believe banks will be allowed reasonable time to rebuild their buffers should there be severe constraints. This means raising more long-term funding and building up its stable deposit base. As a result, this will put further pressure on its funding cost and net interest margin,” she said in a sector update yesterday.

Tan noted investor sentiment towards banks will remain negative with another potential sell- down on the horizon.

“If borrowers continue to face repayment/payment constraints after the moratorium is uplifted, higher default rates will start to show up on bank’s balance sheets and will be reflected as higher impaired loan provisions (or credit cost),” she added.

She said earnings growth for the sector remains unexciting, while the introduction of additional measures by BNM has put further pressure on banks’ liquidity and funding.

Hong Leong Investment Bank Bhd (HLIB) research analyst Chan Jit Hoong reckons, while BNM is trying to blunt the impact of Covid- 19, banks may come in as slight losers in the process.

“We believe the automatic six- month loan moratorium to all consumers and SME borrowers will affect their cashflow; this is because both the loan principal and interest need not be serviced temporarily,” he said in a note yesterday.

Although banks’ cashflow will be briefly affected, Chan however believes, the drawdown of some prudential buffers can help maintain their business operations.

“Thankfully, BNM has allowed the drawdown of some prudential buffers to aid its initiative. From our estimates, banks under our coverage are able to cover their potential cash outflow over the next six months — assuming they can deploy all of their cash balances.

“Asset quality can be sustained over the six months, but after that, it could wane due to the potential economic hangover post-Covid-19,” he said, adding near-term headwinds are being balanced out by the sector’s inexpensive valuations.

HLIB also retains a ‘Neutral’ stance and likes banks that were acutely bashed down.

HLIB preferred picks are CIMB and Alliance Bank Malaysia Bhd and has a ‘Buy’ call on RHB Bank Bhd and BIMB Holdings Bhd.

AllianceDBS Research Sdn Bhd analyst Chin Jin Han opines the move is positive for banks and it sheds more light on BNM’s decision to reduce the statutory reserve requirement by 100 basis points from 3% to 2% last week.

“Overall, this helps address the uncertainty associated with earnings and asset quality arising from Covid-19 (and movement restriction order) fallout.

“Like the previously approved Covid-19-related moratoriums, these loans are unlikely to be classified as impaired and translate to higher provisions (unless demonstrably compromised),” he said.

Chin also said the sector earnings should not be significantly impacted as interest income still accrues with little requirement for higher provisions.

However, he does not discount the possibility of further policy rate action to support the economy, which would be detrimental to banks’ margins given flagging credit demand.

“Although moratoriums for corporate loans would also be considered to preserve jobs, we maintain that flagging economic growth and depressed oil prices still pose risks for banks with sizeable wholesale exposures.

He prefers Hong Leong Bank Bhd and Public Bank Bhd for their conservative risk appetite, robust asset quality and limited exposure to the oil and gas sector.