Loan growth to pick up in 2H20 with lower OPR

Banks in Malaysia are likely to clock in loan growth between 3% and 4% for the year, almost similar to 2019’s 3.9%


LOAN growth is expected to surge in the second half of 2020 (2H20) driven by the reopening of the economy and the stimulus measures announced in the short-term National Economic Recovery Plan (Penjana) amid a low interest-rate environment.

Banks in Malaysia are likely to clock in loan growth between 3% and 4% for the year, almost similar to 2019’s 3.9% as Bank Negara Malaysia cut its Overnight Policy Rate (OPR) by 25 basis points (bps) to 1.75% yesterday as part of its monetary stimulus effort to provide cheaper cash to consumers and businesses.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the lower interest-rate environment would encourage fresh borrowing and refinancing.

“We can expect more customers to reschedule and restructure their borrowing soon. Hire purchase (HP) financing should be more lively from May onwards. As such, loan growth should pick up its pace in the later part of the year,” he told The Malaysian Reserve (TMR). Loan growth was 7.7% in 2018.

He added that the central bank has the room to cut its OPR again but the main concern now is will the 125bps in cuts done this year be effective enough.

Loans especially to the automotive and residential property sectors are likely to see an uptake, Mohd Afzanizam said.

Sales of autos shot up to 22,960 units in May from an all-time low of 141 units in April with carmakers saying sales in June remained strong, helped by the reduction in sales taxes in Penjana.

The GDP for the second quarter of 2020 (2Q20) is expected to contract sharply due to the movement restrictions with the World Bank recently forecasting by 10% in the quarter.

Mohd Afzanizam said banking asset quality and economic growth tend to correlate with asset quality deteriorating when the economy is weak.

“As Malaysian economy is expected to experience a recession this year, asset quality will deteriorate and therefore, there may be a need to bump the level of loan loss provision,” he said.

Gross impairment ratio has risen to 1.58% by the end of April from 1.52% in December last year. The lower rates could also help banks contain the bad loan outlook.

MIDF Amanah Investment Bank Bhd (MIDF Research) senior analyst Imran Yassin Yusof believes the effect of the Covid-19 pandemic and Movement Control Order on the economy will manifest further and impact the sector’s profitability.

“We believe banks earnings will continue to be under pressure in 2Q20. While we expect positive pre-provision operating profit, provisions will continue to weigh down earnings.

“Loan growth will be decent but this is more due to less repayment given the loan moratorium rather an increase in fresh new loans,” he told TMR.

MIDF Research does not foresee a blanket loan moratorium extension although some parties have called for it, but does not discount the potential for targeted extensions.

“It depends on whether the banks have concluded restructuring and rescheduling of potentially troubled accounts,” he added.

Maybank Investment Bank Bhd (Maybank IB) in May estimated the modification loss for the banking industry as a whole worked out to be about RM4.4 billion.

As banks are not being able to collect additional interest on HP instalments over the six-month period, it will lead to a one-off Day-One provision, according to Maybank IB.

CGS-CIMB Research estimated the modification loss would reduce banks’ financial year 2020 net profit by 14.4%.

Last month, Malayan Banking Bhd (Maybank) reported about RM1 billion of Day-One modification loss for fixed rate financing assumptions from the six-month moratorium of HP loans.

The amount would be reflected in its 2Q results, its president and CEO Datuk Abdul Farid Alias said.


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