Loans under repayment assistance pose risks to banks’ asset quality

by ASILA JALIL / pic by MZUKRI MOHAMAD

THE bank’s asset quality will deteriorate as support measures for borrowers who are under the repayment assistance due to the pandemic gradually expire.

In a report today Moody’s Investors Service said that the increase in loans under the repayment assistance is credit negative for the banks because a greater proportion of loans might become delinquent when the assistance ends in June, especially if the economic conditions remain subdued.

The movement restrictions imposed in January further exacerbates the risk to asset quality and economic growth this year.

“We expect asset quality to deteriorate as support measures to borrowers gradually expire. The extent of the migration to nonperforming loans will depend on the pace of the economic recovery in the second half of this year,” it said in the report.

The firm noted that Malayan Banking Bhd, Public Bank Bhd, RHB Bank and CIMB Group had each reported an increase in loans with reduced or deferred installments.

The proportion of loans under the repayment assistance for these banks increased to 13% on average in February from 11% in November last year.

As for Hong Leong Bank, its loans under repayment assistance declined to 7% in January from 8% in November 2020.

It said the increase in retail loans under the assistance is consistent with increased unemployment and underemployment reducing borrowers’ incomes.

“The increase is being driven by take-up among retail borrowers and vulnerable population segments including the so-called B40, households whose incomes are at the bottom 40% of the population.

“Although the Ministry of Finance projects that unemployment will fall to 3.5% in 2021 from 4.8% at year-end 2020, it will still be higher than the pre-pandemic 3.2% at year-end 2019.”

In addition to a higher  unemployment rate, it also said the time-related underemployment rate rose to 2.4% at year-end 2020 from 1.1% a year earlier because of shorter operating hours and job rotation among workers.

Loans under he repayment assistance are also not classified as impaired which led to banks registering lower non performing loans.

“Nonetheless, Malaysian banks still have strong capitalisation and loan-loss coverage ratios to buffer losses.

“On average, the five banks’ Common Equity Tier 1 capital ratio was stable at around 14.4% at year-end 2020 compared with 14.3% a year earlier, while the average loan-loss coverage ratio improved to 148% from 94% as a result of efforts to front-load provisions,”

It added the banks’ proactive provisioning will prevent a surge in credit costs if asset quality deteriorates this year as the firm expects.