Banks expected to register lower earnings in 4Q20

by ASILA JALIL / pic by MUHD AMIN NAHARUL

BANKS’ earnings are expected to remain under pressure in the fourth quarter of 2020 (4Q20) due to a combination of factors impacting growth prospects.

MIDF Research head of research Imran Yassin Md Yusof said a “flattish” quarter-on-quarter (QoQ) growth in banks’ earnings per share in 4Q20 is very likely due to the reimposition of the Movement Control Order (MCO).

“However, net interest income is expected to begin recovering despite the multitude Overnight Policy Rate (OPR) cuts as the effect of those cuts should normalise by then.

“All-in, we are expecting earnings for banks under our coverage to fall 24% year-on-year and 4% QoQ on a consolidated basis,” he told The Malaysian Reserve (TMR) yesterday.

He opined that the extension of repayment assistance and targeted loan moratorium will not increase provisions or non-performing loans (NPL), and banks are not expected to make more provisions.

This is because the current situation is “gradually normalising” with the availability of the Covid-19 vaccines.

“While we are facing short-term difficulties now, the situation is not the same as what we went through last year.

“We would not classify the current risk faced by the financial institutions as elevated. For one, banks are well capitalised and sufficiently buffered to meet any headwinds.

“Therefore, we believe banks are facing the impact of the Covid-19 pandemic in a position of strength,” he said.

Although risks do exist for the sector, Imran Yassin said this would only lead to banks facing some earnings pressure at most.

The risk factors will diminish when the vaccine is made widely available in Malaysia earliest by 3Q21, he added.

Sunway University Business School economist Prof Dr Yeah Kim Leng said the low OPR environment has a lesser effect on the banking sector’s earnings compared to the increase in loan loss provisions and write-offs, as well as the slowdown in lending and non-interest income activities.

He said this can be seen in the slight uptick in interest rate spreads between the banking system’s average base lending rate and the deposit last year, which indicates interest margin has not been adversely affected by the low OPR environment.

Financial institutions, however, will continue to face downward pressure on earnings and risk of asset quality deterioration if the economic downturn persists.

“Despite the severity of the economic contraction in the April-May quarter last year when the nationwide MCO was in force, the banking system’s NPL ratio remained relatively unchanged at 1.5% as at November 2020.

“A key contributing factor to the low impact on asset quality so far is the loan moratorium which has been extended to 1Q21,” Yeah told TMR.

The planned vaccine rollout by end of February will influence market confidence in the economic recovery.

Yeah said a smooth implementation and adequate coverage of the national vaccination programme, coupled with the relaxation of movement restrictions, will expedite the recovery in consumption, production and investment activi- ties to pre-pandemic levels in the second half of this year.

“This will alleviate lingering concerns over the impact of the end of the moratorium on banks’ loan asset quality, and importantly, lead to a stronger recovery in lending and other banking activities,” he added.

Bank Negara Malaysia’s Monetary Policy Committee maintained the OPR at historical low of 1.75% on expectations the economy is set to improve from 2Q onwards on the back of recovery in global demand, turnaround in public and private sector expenditure, and higher production from existing and new manufacturing and mining facilities.


Read our earlier report

Banks’ earnings to recover in 4Q