Strong loss absorbing buffers will help mitigate the increases in asset risks caused by the unprecedented plunge in oil prices since March
by DASHVEENJIT KAUR/ pic by TMR FILE
MALAYSIA’S three largest banks by assets will face growing pressure on profitability with their asset quality likely to deteriorate from 2021 as loan repayment moratoriums expire, according to Moody’s Investors Service Inc.
Amid the coronavirus-led downturn, loan moratoriums will soften the near-term blow for Malayan Banking Bhd (Maybank, A3 stable, A3), CIMB Group Holdings Bhd (Baa1 stable) and Public Bank Bhd (A3 stable, A3), but pressure is set to rise.
A sharp increase in credit costs and contracting net interest margins (NIMs) will weigh on the profitability of all three banks this year, Moody’s VP and senior credit officer Alka Anbarusa said.
“Yet, a deterioration of asset quality will become evident only from 2021 as a large share of loans will remain under loan repayment moratoriums for most of the year,” she said in a report last Friday.
NIMs will contract at most banks in 2020 as policy rate cuts by Bank Negara Malaysia (BNM) leads to declines in the lending rates.
According to Moody’s, the share of impaired loans increased by 36 basis points (bps) to 3.4% at CIMB Group and by seven bps to 2.7% at Maybank, largely driven by new loan impairments in Singapore and Indonesia.
Asset quality was stable at Public Bank, which is more focused on the Malaysian market with 80%-90% of its loans under repayment moratoriums.
“By comparison, so far, just 45%-50% of loans were under moratoriums at CIMB Group and Maybank, although the banks expect the percentage to increase,” Anbarusa said.
In the report, Anbarusa stated that asset risks for banks would grow in the next two years as economic conditions worsen due to disruptions caused by the coronavirus outbreak.
“A sharp decline in global consumption will hurt export-oriented sectors, particularly electronics, construction and real estate, which will put banks’ exposures to them at risk.
“At CIMB Group, about 5% of loans are to sectors that are directly affected by the coronavirus outbreak — aviation, hospitality, retail and gaming. Another 18% are to sectors that are indirectly affected such as oil and gas (O&G), and palm oil,” she said.
The other two banks did not provide a similar breakdown.
The banks’ strong loss-absorbing buffers will help mitigate the rise in asset risk, with loan loss reserves exceeding 100% of impaired loans at most banks as of March 2020,” said Anbarusa.
She also believes capitalisation should remain stable as capital generation will outpace capital consumption due to weaker loan growth and liquidity too would remain strong, underpinned by deposit growth.
Anbarusa believed strong loss absorbing buffers would help mitigate increases in asset risks.
Moody’s report showed that among the three banks, asset quality deteriorated the most at CIMB Group, with gross impaired loans (GILs) ratio rising to 3.4% at the end of March 2020 from 3.1% at the end of December 2019, driven by new defaults in the O&G sector in Singapore.
GIL ratios at Maybank and Public Bank were largely stable, although Maybank reported rises in impaired loan ratios for its operations in Indonesia and Singapore.
Public Bank’s GIL ratio of 0.5% as of the end of March 2020 is much lower than the sector average.
Anbarusa also noted an unprecedented plunge in oil prices since March 2020 is adding to asset risks for banks.
The ratio of loan loss reserves, including regulatory reserves, to impaired loans was broadly stable at Maybank and Public Bank at the end of March 2020, while CIMB Group posted a decline because of increases in impaired loans.
Anbarusa highlighted that although profitability would weaken this year, capital generation will continue to outpace capital consumption due to weaker loan growth, leading to further rises in capital ratios.
She also believes expansion of risk-weighted assets due to downgrades of loans is likely to accelerate toward the end of 2020 or early 2021 when loan moratoriums are lifted.
The credit rating agency’s report suggests liquidity at Malaysian banks will stay robust, helped by strong deposit growth and modest loan growth.
“The share of Current Account Savings Account (CASA) in total funding mixes increased 400bps at Maybank and 200bps at CIMB Group as these deposits grew faster than usual.
“Public Bank’s CASA ratio was largely unchanged. Despite the expansion of CASA deposits, loan-to-deposit ratios at the three banks were little changed as they reduced the share of costlier term deposits in light of weak loan growth,” the report stated.
Anbarusa expects this trend to continue in the next few quarters as BNM is also encouraging banks to lend by temporarily lowering regulatory requirements for liquidity and capital, similar to measures introduced by the European Central Bank in March 2020.