No fear of rise in NPLs and provisioning due to MCO 3.0, say analysts

MCO 3.0 will not have much impact on the banks’ asset quality either as the current movement restrictions measures are not as strict as MCO 1.0 last year


WITH the Covid-19 pandemic infection number soaring nationally and call growing for financial assistance measures for the public, analysts have mixed reviews on the banking system’s non-performing loans (NPL) and provisions in the second quarter of 2021 (2Q21), due to the third Movement Control Order (MCO 3.0) that is being put in place.

MIDF Research VP and head of research Imran Yassin Mohd Yusof said the sector would not see a rise in NPLs or provisions in the quarter, rather, the provisions will start to normalise.

“As for NPLs, we expect them to remain stable given the ongoing targeted assistance programmes. There might be a slight uptick but we believe it will remain manageable,” he told The Malaysian Reserve (TMR).

He added MCO 3.0 will not have much impact on the banks’ asset quality either as the current movement restrictions measures are not as strict as the first MCO last year.

To add to that, the economy is expected to be on the recovery track this year.

“In our view, banks have exhibited their resiliency during MCO 1.0 last year, and we believe the sector continues to be in a robust position due to build up of capital over the years. Banks have built up loan loss buffers to ensure they can withstand short term headwinds,” he added.

On the other hand, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid is of the view NPLs and provisions will rise in the 2Q as the economy remains vulnerable to shocks following the re-imposition of the movement restrictions measures as infection numbered soared to over 7,000 cases daily this week, after Health Ministry officials warned of a spike.

“It is going to be a challenging environment for some borrowers to repay their debt obligation in a timely manner as the country’s labour market is still weak with jobless rate remaining elevated at 4.8% in 1Q21, he said.

He, however, added the financial positions of domestic banks is good with the level of capitalisation well above the minimum prescribed level of 8% and the liquidity coverage ratio continues to hover more than 100%.

“So, banks are well capitalised and very liquid and are in the position of strength to withstand shocks,” he told TMR.

Public Bank Bhd’s 1Q results suggest a recovery for the sector despite an uptick in its targeted repayment assistance (TRA) figure. The retail banking powerhouse’ reserve for impaired loans for financial year 2021 (FY21) is likely to be lesser than the hefty provisions it made last year, said analysts.

Last year, the bank allocated RM650 million for pre-emptive measures against the impact of the Covid-19 pandemic and suffered a Day-1 modification loss of RM498 million.

Hong Leong Investment Bank research analyst Chan Jit Hoon said due to the less-restrictive nature of the MCO 3.0, the provision allocated for Public Bank’s FY21 will not be as high as seen in the previous year.

“I don’t think Public Bank’s FY21 provision will be higher than FY20. It is because they have done a lot of pre-emptive provisioning in the last year which has yet to be utilised,” he told TMR.

For its 1Q performance ended March 31, 2021, the bank saw its net profit grow 15.11% year-on-year (YoY) to RM1.53 billion supported by the lower interest expense which had offset the fall in its revenue.

Quarterly revenue dropped 8.87% YoY to RM5.03 billion while its cost-to-income ratio stood at 31.8% and the return-on-equity at 13.5%.

Chan expects banks will continue to provide targeted loan assistance to specific groups of borrowers to ease the financial burden on the banks.

“As long as Covid-19 is in the picture, I believe most banks will continue to provide assistance to troubled borrowers. In any case, it will remain targeted in nature,” he added.

Chan added bank lending activity is recovering as reflected in strong mortgage and auto loans given over the 1Q.

CGS-CIMB Securities Sdn Bhd analyst Winson Ng stated, in a recent report, the small increase in loans under Public Bank’s TRA is not alarming.

“Public Bank has indicated that loans under TRA accounted for 12% of its total domestic loans, which was higher than the 11% disclosed by the bank earlier.

“We are not overly concerned about this as the increase was not significant while the ratio of 12% would still be one of the lowest in the sector. The bank’s GIL ratio was stable at 0.35% at the end of March against the 0.36% at the end of December last year,” he said.

Looking into the types of Public Bank’s borrowers, its TRA loans made up 11% of Public Bank’s individual loans, housing loans (11%) hire purchase loans (6%) and non-individual loans (14%), Ng noted.

Dayang Norazhar

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