Lower provision to lift banks’ profitability by 30% in 3Q20

On a yearly basis, banks’ earnings will continue to be weak, dragged down by higher provisions


MALAYSIAN banking sector is expected to post better earnings in the third quarter of 2020 (3Q20) underpinned by lower provisions on a quarterly basis and expected improvements in the net interest margin (NIM).

MIDF Amanah Investment Bank Bhd (MIDF Research) head of research Imran Yassin Mohd Yusof said these factors are likely to increase banks’ profitability up to 30% on a sequential-quarter basis.

“This is because we expect provisions may be lower on a quarter-on-quarter (QoQ) basis and there could be an improvement in terms of NIM as there could be reprising in deposits following cuts in the Overnight Policy Rate (OPR).

“We also see robust loan growths in 3Q20 due to the short-term National Economic Recovery Plan (Penjana) stimulus among others, which will give some support to net interest income. In total we are looking at 25% to 30% QoQ improvement in earnings,” he told The Malaysian Reserve (TMR) in an email reply recently.

Driven by higher growth in loans for the purchase of residential properties (7.4%) and non-residential properties (2.3%), the total loans grew 4.5% in July from 4.1% in June amid the low-interest-rate environment.

MIDF Research has previously stated that with Penjana, retail loans grew 5.15% to RM924.5 billion in July compared to 4.4% to RM914 billion in June. Business loans increased by 3.2% to RM796.4 billion (June: 3.3% to RM799.4 billion).

However, on a yearly basis, banks’ earnings will continue to be weak, dragged down by higher provisions, he said.

Imran Yassin added that earnings for local banks are poised to contract by 20% YoY in 3Q20 compared to the same period last year.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said although earnings outlook for local banks will remain challenging in the near term, the impact, however, might not be severe as the OPR was maintained in the recent Monetary Policy Committee meeting.

“Nonetheless, the 25 basis points (bps) OPR cut in July would be felt during the September quarter as financing rates especially those with variable contracts will be adjusted almost instantly, while the deposit rates will take a while as the new rates will only apply once the deposits mature,” he told TMR.

Banks Negara Malaysia has maintained the OPR at 1.75% as it sees improvement in the domestic economy following the easing of pandemic containment measures.

The central bank has slashed the benchmark lending rate four times since January this year in a bid to mitigate the impact of the Covid-19 pandemic. The OPR was reduced by 25bps in July bringing it to a historic low since its introduction in 2004.

Mohd Afzanizam said the decline in bonds and sukuk yields would help to cushion the impact from NIM compressions.

“For instance, the 10-year Malaysian Government Security yields have dropped by 25bps from end June to Sept 15 to close at 2.62%.

“Lower bond yields will translate into higher bond prices and therefore, banks should be able to lock-in decent gains from the holding of marketable securities,” he added.

Bank earnings were significantly hit in the 2Q mainly due to hefty modification loss and pre-emptive provisions as well as markedly thinner NIM.

Several top banks in the country such as Public Bank Bhd, Malayan Banking Bhd, CIMB Group Holdings Bhd and RHB Bank Bhd did not declare dividend payments in 2Q20.

It was the first time that Public Bank, the second-largest bank in the country, did not declare a dividend in 2Q20 as opposed to 33 sen per share in 2Q19 while CIMB and Maybank plan to maintain its dividend payout policy of 40% to 60% of earnings to shareholders.

Mohd Afzanizam noted that banks would be “more careful” on their dividend payment as the economic outlook remains uncertain.

“It is quite a delicate balancing act between having a strong capital buffer and the need to grow financing assets especially risks of impaired financing is visible. Thus far, gross impaired financing has been declining to 1.43% as of July from a high of 1.59% in March.

“In light of the lower interest-rate environment, the non-fund based income (for Islamic banks) or the non-interest income (for conventional banks) is crucial to minimise the impact from NIM compression,” he added.

Imran Yassin said banks will likely commit to their dividend policy payout this year, albeit at the lower range of its dividend policy as banks may remain cautious due to uncertainty surrounding asset quality, especially after the six-month loan moratorium.

“We opine that banks will likely want to retain more capital due to this uncertainty especially as provisions might remain elevated until the first quarter of next year,” he added.