Banking system’s bad loans rise 6.5% YoY

Affin Hwang Capital downgrades loan growth target to -3% YoY, given a more subdued and cautious economic outlook in 2020


MALAYSIAN banks are showing signs of deteriorating asset quality amid slowing economic growth and the Covid-19 pandemic, with the banking system’s outstanding gross impaired loans (GIL) rising 6.5% year-on-year (YoY) to RM27.86 billion in February 2020.

For the year-to-date, total impaired loans are up 4%, Affin Hwang Investment Bank Bhd (Affin Hwang Capital) wrote in a note yesterday.

The system’s bad loan ratio also increased to 1.57% in February from 1.5% in December 2019, mainly led by financing activities, household transportation and manufacturing.

“Notably, the working capital, residential property, construction and commercial property segments make up the bulk of impaired loans by ‘loan purpose’,” it said.

However, the system’s liquidity coverage ratio was comfortable at 148% and the loan-to-fund ratio was unchanged at 83.3% in February.

“Given a more subdued and cautious economic outlook in 2020, our loan growth target has been revised down to -3% YoY, while not discounting the possibility of a further increase in the system impaired loans.

“Our economics team has revised down 2020 estimated GDP growth to -3.5% due to an expected slow- down in private investment and consumption spending in light of the ongoing Covid-19 outbreak in the country,” Affin Hwang Capital said.

The firm maintained its ‘Underweight’ call for the banking sector as earnings growth remains “unexciting”, while additional measures by Bank Negara Malaysia have put further pressure on banks’ liquidity and funding.

A prolonged Covid-19 outbreak will also cause non-performing loans to spike.

“At this juncture, we foresee a contraction in the sector’s core earnings per share growth of 20% YoY in 2020E, and a slightly modest growth rate of 1.5% YoY in 2021E,” the research house added.

This is in sharp contrast to September 2019, when Public Bank Bhd, Hong Leong Bank Bhd and Citibank Bhd had below 1% GIL ratios, according to RAM Rating Services Bhd’s (RAM Ratings) banking scoreboard.

“The common equity Tier 1 (CET-1) ratios of the banks in our sample were above 12% as at end-September 2019.

“This is significantly higher than the minimum regulatory requirement of 7% and the more stringent capital requirements imposed on those designated as domestic systemically important banks (Malayan Banking Bhd and CIMB Group Holdings Bhd, 8%; and Public Bank, 7.5%),” RAM Ratings said in a statement yesterday.

HSBC Amanah Malaysia Bhd, Public Islamic Bank Bhd and Hong Leong Islamic Bank Bhd reported higher sales of retail deposits relative to peers which reflect a stronger consumer focus.

Islamic banks that belong to larger banking groups have a greater proportion of retail deposits to total customer deposits when juxtaposed with standalone Islamic banks, the rating agency added.

Separately, RHB Investment Bank Bhd (RHB Research) said the domestic banking system recorded 3.9% YoY loan growth in February driven by higher corporate loans. Corporate loan growth increased 3.2% YoY on higher loan disbursements to mining, manufacturing, utilities, finance, and wholesale and retail.

Household loans moderated slightly with a growth of 4.4% YoY following a weaker growth in credit cards and consumer durables.

Loans for residential property showed higher growth for the month.

“Despite better performance in February, we expect bank lending to moderate to 2.6% for 2020 from 3.6% earlier. This is on account of weaker growth prospects.

“We think demand for credit will be hampered by increased volatility and the dampening impact of the Movement Control Order,” RHB Research said.

Money supply growth is also expected to weaken to 2% in 2020, as there may be a continuation of foreign capital outflow due to uncertain global economic conditions. Improvements in public spending, however, could provide an upside.

“From a monetary perspective, weaker growth expectations in credit creation will likely imply soft demand pressure on the prices of goods and services on top of already lower commodity prices,” it said.