Bank asset quality to stay resilient despite repayment assistance


MALAYSIAN bank asset quality is expected to display resilience and the targeted repayment assistance given by banks to borrowers is likely to pose a moderate risk to recovery.

MIDF Amanah Investment Bank Bhd head of research Imran Yassin Mohd Yusof said based on data provided by banks under the firm’s coverage, targeted assistance represents below 20% of banks’ total domestic loans book.

“We should note that we do not expect this 20% to turn non-performing once the targeted assistance ends. This is due to the fact the economy will start to improve once it is fully open.

“Troubled borrowers could extend the assistance through rescheduling and restructuring its current loans with the banks. Hence, we do not expect banks’ asset quality will deteriorate significantly,” he told The Malaysian Reserve yesterday.

In a report released recently, Moody’s Investors Services Inc stated that loans with repayment assistance pose risks to banks’ asset quality.

Although some banks have helped to restructure loans in order to allow borrowers extra time to recover from pandemic-related setbacks, such assistance is seen reflecting credit negative for the banks because a greater proportion of loans will become delinquent when the repayment assistance ends in June.

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

Imran Yassin said the effects of a deteriorating asset quality will be reflected on earnings via higher provisions if the asset does not have sufficient coverage and on lending practices.

Banks may be forced to tighten lending should the asset quality worsen and this could have an impact on the economy given that lending is an essential component for a robust economy, he said.

He noted that most banks under the research house’s coverage have sufficient loan loss coverage and will be able to absorb those impaired loans.

“Capital remains ample and far exceeds the requirement set by regulators. All in, we believe the banking system remains robust and will be able to weather any short-term difficulties.

“Going forward, we expect banks will perform better this year given the economy is set to improve and this is further strengthened with the vaccine rollout,” said Imran Yassin.

Based on data by Bank Negara Malaysia, he said the gross impaired loan (GIL) ratio for the banking industry saw an uptick of 18 basis points (bps) quarter-on-quarter to 1.57% as at December last year.

A further uptick by 3bps was recorded at the end of last month, on a month-on-month basis.

“With the ending of the targeted assistance, we could expect similar or slightly less in terms of the GIL ratio uptick. This is premised upon the economic recovery gathering pace following the ending of Movement Control Order (MCO) 2.0 (moving to Conditional MCO now) and the vaccine rollout,” he added.

In the report, Moody’s noted that Malayan Banking Bhd, Public Bank Bhd, RHB Bank Bhd and CIMB Group Holdings Bhd had each reported an increase in loans with reduced or deferred instalments.

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 Bhd, 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 bor- rowers’ 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 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,” Moody’s noted.

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 the repayment assistance are also not classified as impaired, which led to banks registering lower NPLs.

“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 to 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,” said Moody’s.