Banks’ earnings dented in 2Q as pandemic impact unfolds

by PRIYA VASU & AZALEA AZUAR/ pic by TMR FILE

WIDESPREAD loan losses, Bank Negara Malaysia’s loan moratoriums and lower operating expenses have challenged the profitability of local banks in the second quarter (2Q) this year.

Interest-rate cuts and weaker loan growth amid the challenging business environment limited earnings of banks.

Public Bank Bhd, the second-largest bank in the country, which was supposed to be the safest bet in the sector during the economic downturn, for the first time declared no interim dividend for the 2Q ended June 30, 2020 (2Q20), as opposed to 33 sen per share in 2Q19.

The group suffered large modification loss of RM498 million due to loan moratorium offered to borrowers amid the Covid-19 pandemic.

Its earnings fell 24.48% year-on-year (YoY) to RM1 billion for the quarter as the group operating revenue slid 15.35% YoY to RM4.74 billion.

“The lender may not be spared as the banking sector grapples with potentially higher bad loans, yet its asset quality appears likely to remain more defensively positioned than peers,” Bloomberg Intelligence’s Diksha Gera said in a research note before Public Bank’s 2Q financial results announcement.

In a filing to Bursa Malaysia last week, the banking group stated that it had to contend with the negative effects of the 100-basis-point cut in the Overnight Policy Rate during the period.

“Loan impairment allowance was higher by RM92.3 million in anticipation of the potential effect of Covid-19 pandemic and the net fee and commission income was lower by RM14.5 million mainly due to lower banking-related business activities arising from the Movement Control Order (MCO),” Public Bank said to the stock exchange.

Public Bank shares closed 1.2% or 20 sen lower at RM16.42 last Friday, valuing the bank at RM63.7 million.

CIMB Group Holdings Bhd’s earnings took a beating in 2Q20, with net profit plunging 81.6% YoY to RM277.1 million due to elevated provisions, as well as a modification loss as a result from the loan moratorium.

The group’s quarterly revenue slipped 13.5% YoY to RM3.87 billion. “CIMB Bank’s overall asset quality has weakened, with gross impaired loans ratio rising to 2.67% (industry average: 1.59%) as at end-1Q20, even before the impact from the pandemic was felt.

“Coupled with the current challenging economic conditions, CIMB Bank’s asset quality metrics are likely to remain under pressure in the foreseeable future. Its loan loss coverage, including regulatory reserves, reduced to 65.4% in 1Q20 from 91.8% in 2019,” said Malaysian Rating Corp Bhd (MARC) in a research note.

MARC added that the bank’s loan growth will be in the low single digits for 2020, compounded by the recent interest-rate cuts which will further compress margins, while earnings will be weighed down by additional expenses on the waiver of additional interest on hire purchase loans during the deferment period.

CIMB’s shares closed 2.1% or seven sen lower at RM3.30 last Friday, valuing the group at RM32.75 billion.

RHB Bank Bhd also fell victim to a RM392.4 million one-off modification loss that dragged its net profit by 34.9% YoY to RM400.7 million.

The bank was impacted by higher allowances for credit losses on loans, advances and financing, offset by the higher net fund based income and non-fund based income, and coupled with lower operating expenses.

“We have recognised a net loss of RM392.4 million arising from the modification of cashflows of these loans and financing in the 2Q20,” the group said in a Bursa filing.

Asset quality outlook is still cloudy as RHB was not able to provide more colours to the proportion of these loans that will require an extension post-September. “Vulnerable sectors made up 9.5% of group loans mainly relating to tourism and hospitality (3%), and retail and wholesale trade (3%),” Kenanga Research analyst David Chong stated in a research note in July, explaining its exposure to risky loans.

Malayan Banking Bhd (Maybank) net profit fell by 51.55% YoY to RM941.73 million in the quarter as net interest income and Islamic banking income dropped due to significantly higher allowance for impaired loans amid a Covid-19 pandemic-driven weaker economic outlook.

Its group revenue declined to RM11.79 billion in 2QFY20 from RM13.05 billion.

For the first half of 2020 (1H20), Maybank’s cumulative net profit fell to RM2.99 billion from RM3.75 billion a year earlier, while revenue was lower at RM25.01 billion versus RM26.03 billion.

MIDF Research in a note said the bank is starting to see the Covid-19 impact and the implementation of the MCO to Maybank’s earnings in 2QFY20.

“We expect credit cost will continue to be elevated this year and potentially spill over to financial year 2021. This is especially so post loan moratorium. Non-interest income will moderate this impact and the weakness in net interest income.

“Most of all, we are disappointed that there were no dividends in the quarter as per the norm in previous years. This concerns us as there could be a possibility dividends will be lower than expected,” stated MIDF Research.