MCO 2.0 to heighten banks’ asset quality risks


THE recently imposed Movement Control Order (MCO) is expected to heighten the asset quality risks of financial institutions and prolong the recovery period for banks to beyond 2021, Fitch Ratings Inc stated.

The government implemented the second round of MCO since Jan 13, which is dubbed as MCO 2.0, to curb the number of positive Covid-19 cases that have been rising as a result of the third wave of the pandemic.

“The government reimposed a two-week MCO on all states except Sarawak and declared a nationwide state of emergency as persistently high coronavirus infections are straining the country’s healthcare infrastructure.

“We expect banks’ earnings to remain under pressure as credit costs rise, but the risks of widespread loan losses leading to capital impairment remain limited unless the economy deteriorates significantly from our base case,” the rating agency said in a statement yesterday.

The rating agency added that a prolonged lockdown could disrupt consumer and business confidence, and would likely aggravate the finances of already-weakened sectors such as food and beverage, services, hospitality, retail and transportation.

“Past experience suggests that the MCO is likely to be extended, even if only in a less restrictive form. The first imposition of a two- week MCO in March 2020 ended up being eight weeks’ long.

“Last year’s six-month blanket moratorium propped up asset quality, with the system’s impaired loan ratio falling to a historical low of 1.38% by end-September 2020.

“Such relief most likely bridged some would-be defaulters through short-term liquidity difficulties,” it said.

The rating agency is also expecting credit impairment to continue rising in 2021.

“The new lockdown has not caused us to raise our impaired loan projection of 2.6% as at end-2021 unless they prove prolonged, but downside risks to asset quality have certainly increased,” said Fitch.

Credit stress will be more prominent among borrowers in worst- affected sectors and those on the fringes of the credit curve, rather than broad-based defaults.

“Most Malaysian banks’ portfolios are domestically oriented and centred on household lending, of which collateralised housing loans make up about 35% of total loans,” it said.

Fitch also projected credit costs to remain high in the near term which will put pressure on banks’ profitability for the rest of the year.

“Reserves against impaired loans in the system were modest at 1.6% of gross loans at end-November, below the 3% average in South-East Asia’s six largest banking systems.

“Nonetheless, the risks of capital impairment remain manageable amid high pre-provision profit buffers. Capitalisation is adequate with a system average common equity Tier-1 ratio of 14.5% at end-November,” it said.

Commenting on the country’s financial assistance, the rating agency is expecting the expansionary monetary conditions and banks’ loan repayment assistance to continue.

“The government’s announcement of a RM15 billion stimulus on Monday includes wage subsidies, small and medium enterprise grants and welfare handouts to alleviate households and businesses in difficulty.

“The proportion of loans under relief — 10% to 15% of the major banks’ domestic portfolios in November 2020, down from a peak of more than 50% in June 2020 — could rise again as financial relief gets extended.

“This will moderate reported impaired loan ratios in the near term, but obscure loan quality for even longer,” it said.