Loan loss provisions taper banks’ earnings in 2020

The lenders’ earnings in CY21 can still be fragile given the enforcement of MCO 2.0 but it can recover due to lesser provision set aside for bad loans


HIGH loan loss provisions and a at loan growth stemming from the pandemic induced economic slump last year had dragged the banking sector’s overall financial performance in 2020.

Most lenders had attributed the lower yield to the central bank’s consecutive interest-rate reduction last year, which impacted banks’ net interest income (NII) in addition to higher operating expenditure.

MIDF Amanah Investment Bank Bhd (MIDF Research) head of research Imran Yassin Mohd Yusof said the fourth quarter (4Q) results from banks have been largely mixed though mostly within expectations, with a few exceptions.

He said in general, lower earnings were seen in the quarter dragged by higher provisions and weak NII given the central bank’s 125 basis points Overnight Policy Rate (OPR) cut during the year.

“Nevertheless, there were improvements on a sequential quarter basis. Of the banks’ earnings that came in below our expectations, it was due to higher than expected provisions, but we have to highlight that those provisions were more to build up loan loss buffers in light of the uncertain situation.”

“On a pre-provisioning operating profit level, all banks met our expectations.

“We expect that 1Q for calendar year 2021 (1QCY21) earnings could still be fragile given the enforcement of the second Movement Control Order (MCO 2.0),” Imran Yassin told The Malaysian Reserve.

MIDF Research expects provisions to remain elevated in 1QCY21, with overall earnings projected to improve this year, as the situation is expected to improve given the country’s ongoing vaccination rollout programme and rebound in GDP.

“Loan growth could accelerate in the second half of CY21 as the economy starts to reopen fully. There will be a lingering pocket of weakness, but we expect that it will not be at the same level we saw last year,” Imran Yassin said.

Analysts expect local banks to recover in 2021 due to the lesser provision set aside for bad loans as the country’s inoculation programme gets underway.

The anticipated recovery in the unemployment rate, which climbed to a near three-decade high of 4.5% in 2020, is also expected to contribute to a better economic prospect.

Industry observers said as economic growth momentum picks up significantly with the rollout of vaccines, the reversal in interest-rate trajectory could see bank earnings get a boost from the second half of the year.

All four of the country’s largest lenders, based on market capitalisation, saw their net profit for the financial year 2020 (FY20) decline. CIMB Group Holdings Bhd registering the biggest fall at 73.8% year-on-year (YoY) to RM1.19 billion from RM4.56 billion in FY19, while its revenue declined by 3.4% YoY to RM17.19 billion from RM17.8 billion over the same period.

Malayan Banking Bhd (Maybank), the largest local lender based on market capitalisation, saw its FY20 net profit decline by 20.9% YoY to RM6.48 billion from RM8.2 billion.

The bank attributed the fall to higher net impairment losses due to the continued impact from the Covid-19 pandemic, offset by the higher net operating income and reduced overhead expenses. Its revenue dropped by 3.5% YoY to RM51.03 billion for the year against RM52.87 billion registered in 2019.

Public Bank Bhd’s net profit for FY20 also fell by 11.61% YoY to RM4.87 billion from RM5.51 billion, mainly due to the one-off Day 1 net modification loss related to Covid-19 relief measures amounting to RM498.4 million incurred in 2Q of 2020. The bank’s revenue for the year declined by 9.58% YoY to RM20.3 billion.

RHB Bank Bhd’s net profit declined 18.1% YoY to RM2.03 billion in FY20 from RM2.48 billion in 2019 due to the net modification loss from the loan moratorium and higher expected credit losses. Its revenue for the year also dropped 6.9% YoY to RM12.59 billion from RM13.53 billion.