Local banks face heightened risks, says Moody’s

The 6-month moratorium may also prevent banks from taking early restructuring or recovery action on specific borrowers, leading to higher credit losses


THE central bank’s regulations may soften the near-term economic shock towards banks caused by the Covid-19 outbreak, but it could also raise risks, according to Moody’s Investors Service Ltd.

Analyst Tengfu Li said the debt moratorium announced by Bank Negara Malaysia (BNM) on March 25 will soften the near-term credit-negative impact on the banks’ asset quality, however, it also prevents banks from taking early restructuring or recovery action on specific borrowers.

“This could lead to higher credit losses after the moratorium is lifted. We expect an increase in the banks’ impaired loans after the moratorium ends, especially if the Covid-19 outbreak is prolonged and continues to disrupt domestic economic activity,” he said in a research note yesterday.

The six-month debt moratorium is for borrowers in the retail and small and medium enterprise (SME) segments, to help them manage the liquidity crunch from disruptions caused by Covid-19.

The central bank also relaxed a number of other regulatory norms for the banking sector, including capital, liquidity and regulatory reserve requirements.

“Specifically, banks will grant automatic six-month moratoriums on all ringgit-denominated retail (excluding credit cards) and SME loans that are not in arrears for more than 90 days as at April 1, although borrowers can choose to opt out of this arrangement.

“The interest for these loans will continue to accrue during the deferment period. Banks are also required to help companies in any requests to restructure or defer loan repayments,” Li added.

Notably, before the automatic moratorium, banks were already offering debt moratoriums to borrowers on a case-by-case basis.

Li said more than 70% of the banking system loans as of Dec 31, 2019, will fall under the moratorium. Among the banks Moody’s rated, Public Bank Bhd (A3 stable, a33) and Hong Leong Bank Bhd (HLBB) (A3 stable, a3) have the highest proportion of loans that will be part of the moratorium because these banks focus on the retail and SME segments.

“However, the total amount of deferred loans could change as cash-rich customers opt out and banks grant debt moratorium to corporate borrowers,” Li noted.

Additionally, BNM is also encouraging banks to lend by temporarily lowering the regulatory requirements on liquidity and capital, in line with similar measures undertaken by the European Central Bank in March 2020.

“Specifically, banks can now utilise the 2.5% capital conservation buffer and regulatory reserve, and operate below the minimum 100% liquidity coverage ratio until Dec 31, 2020.

“The minimum net stable funding ratio will also be lowered to 80% from 100% when it is implemented in July 2020,” Li said, adding that these regulatory relaxations could increase risks for bank creditors.

However, for now, Li said Malaysian banks have capitalisation that is well above the existing regulatory requirements.

“Liquidity is also strong, with some buffers above the regulatory minimum. The liquidity pressure arising from the debt moratorium will likely be offset by weak loan demand and an increasing number of borrowers opting out of the automatic moratorium,” he added.

Fitch Ratings Inc has downgraded the ratings of three Malaysian bank’s — Malayan Banking Bhd (Maybank), HLBB and Export Import Bank of Malaysia Bhd (EXIM Bank).

The outlook revision follows Fitch’s revision of the Malaysia sovereign A- outlook to negative from stable on April 9, 2020, reflecting a more challenging economic environment arising from the global pandemic and rising fiscal pressures due to the resultant policy countermeasures.

The rating agency has downgraded Maybank and HLBB long-term Issuer Default Rating (IDR) to BBB+ from A- and Viability Rating (VR) to bbb+ from a-.

On the contrary, EXIM Bank’s long-term IDR was affirmed at A-, but its outlook was revised to negative from stable.

The outlook on Maybank’s long-term IDR is stable, but negative for HLBB.

Maybank’s senior debt ratings and medium-term note programme have also been downgraded to BBB+ from A-.

HLBB’s short-term IDR has been affirmed at F2, support rating and support rating floor have been affirmed at ‘2’ and BBB-respectively, while the rating on HLBB’s medium-term note programme has also been downgraded to BBB+ from A-.

“The combination of multiple adverse developments, including acute economic disruptions, continued political uncertainty and a plunge in energy prices, has significantly weakened Malaysia’s economic outlook.

“Fitch’s base case forecasts the Malaysian economy will shrink 1% in 2020. Gradual recovery and growth prospects for the banking sector will remain soft into 2021.

“Fitch also believes the policy countermeasures and prudential relief introduced by the authorities since late-February have been mostly positive for banks and we have factored in the mitigating effects of the assistance, especially on banks’ liquidity, capitalisation and asset quality,” the rating agency said in a note recently.