Banks’ asset quality a concern as bad loans seen rising come October


BANKS’ asset quality remains a concern for the near term, as impaired loans are expected to increase once the six-month loan moratorium granted to assist Malaysians during the Covid-19 pandemic ends on Sept 30, 2020.

The moratorium will see a delayed impact of the upticks in impaired loans, as banks have been proactively restructuring and rescheduling loans, as well as granting relief funding to prevent a sharp rise in impaired loans, AmInvestment Bank Bhd (AmBank Research) said.

“Nevertheless, there are likely to be certain loans falling into the impaired loan bucket after the moratorium attributed to the cessation of businesses and higher unemployment rate,” it wrote in a report yesterday.

The loan moratorium is one of the government’s initiatives to help individuals, corporates and small and medium enterprises (SMEs) hit by the pandemic, as containment measures force companies and businesses to downsize, take pay cuts, and even close down completely.

On a more comforting note, lenders are already gradually building up their provisioning buffers in anticipation of the impact of Covid-19.

AmBank Research, which is ‘Neutral’ on the industry, projects higher credit costs for the sector at 43 basis points (bps) for 2020 compared to 22bps in 2019.

It expects loan growth to come in at 2% this year against 3.9% in 2019, supported by banks extending SME Special Relief Facilities to ease borrowers’ cashflows.

The deferment of repayments for those opting for the six-month moratorium is also expected to contribute to a higher outstanding loan base for banks. Interest will continue to be accrued for individual and SME loans except for fixed-rate financing despite no payments from the borrowers.

Markets have yet to price in another 25bps cut in the Overnight Policy Rate (OPR) based on the latest interest swap rate, AmBank Research added.

Bank Negara Malaysia (BNM) has cut the OPR three times already this year by a total of 100bps, bringing the benchmark lending rate to a decade-low of 2%. The next meeting of BNM’s Monetary Policy Committee to decide the OPR is scheduled for July 7, 2020.

Separately, Affin Hwang Investment Bank Bhd (Affin Hwang Capital) maintained its ‘Underweight’ call on the banking sector as it believes the industry is not completely out of the woods yet.

Though it expects a 13% year-on-year (YoY) recovery in sector core net profit in 2021, this is subsequent to a drastic decline of 28.6% YoY in 2020.

“In our view, the banks’ balance sheet and liquidity will be subject to more stress in 2020 to 2021 due to the moratorium period offered to borrowers, as well as a higher risk of defaults as economic circumstances remain uncertain,” it wrote in a note.

Despite the re-rating of share prices in the market, prevailing downside risks in the economy and the banking sector may trigger a correction in the liquidity-driven market, which Affin Hwang Capital said is ‘Overbought’ at the moment.

“This is despite the fact that most investors are looking at 2021 as a year for sector recoveries. We agree that banking stocks have rebounded from their lows in 2020, but investors should continue to exercise caution,” it added.