Moratorium to hit banks’ impairment

Banks would not register higher NPLs as the accounts under moratorium would not be viewed as impaired accounts


BANKS could suffer higher impairment loss in the coming quarters as a result of the loan moratorium assistance provided under the stimulus package Pemerkasa+ (Strategic Programme to Empower the People and Economy Plus).

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the loan moratorium would have an impact on financial institutions’ modification loss as lenders are set to lose the value of money in time since revenue collection is deferred.

However, he said, the impact is expected to be transitory when the accounts start to resume payment once the moratorium period ends.

“The main worry is obviously if the account will remain delinquent post moratorium. As such, impairment risks are high in the immediate terms,” Mohd Afzanizam told The Malaysian Reserve.

He expects the non-performing loan (NPL) ratio of the sector would remain intact despite having to accommodate the loan deferments, especially for the bottom 40% income group.

The economist said banks would not register higher NPLs as the accounts under the moratorium would not be viewed as impaired accounts.

He said banks are often conservative, especially under economic stress, considering borrowers would have difficulties in servicing their financial obligations.

Therefore, he said the best practice for banks is to provide more financing loss provision to safeguard their bottom line.

He said the country’s banks are in a strong position, particularly in terms of capital adequacy and liquidity requirements, despite the moratorium.

As such, Mohd Afzanizam said lenders would have ample liquidity to navigate through the period.

“Banks are always being subjected to close scrutiny in respect to capital and liquidity by Bank Negara Malaysia (BNM). Typically, banks would have their internal targets, which are always higher than the minimum required level as prescribed by BNM.

“There is a management action trigger that would necessitate the banks to rectify the situation once the internal targets are breached.”

Under Pemerkasa+, affected individuals can opt for an automatic three-month moratorium or repayment reduction of 50% for six months.

Hong Leong Investment Bank Bhd (HLIB) meanwhile maintained its ‘Overweight’ call on the banking sector, backed by vaccine rollout, undemanding valuations and ample market liquidity, despite the nationwide lockdown.

HLIB noted loan growth stood at 3.9% year-on-year (YoY), supported mainly by the household segment, which grew 6.2%.

It said this was largely backed by mortgage (+7.4%), automotive (+7.3%) and personal financing (+5.5%). Business lending growth remained weak at 0.4%, while working capital loans grew 1.9% to help in mitigating further slowdown.

“Overall, it was within our full-year financial year 2021 (FY21) loans growth expectation of +3.5% to 4.0%,” HLIB analyst Chan Jit Hoong stated in a research note yesterday.

He said the sector’s loan applications expanded 92.1% YoY due to strong credit appetite for the household segment, which jumped fivefold. However, this was capped slightly by the business segment, which contracted 10.3%.

Approved loans jumped 96.4% in April supported by accommodative household lending.

The analyst said banks’ asset quality remained resilient as the gross impaired loans (GIL) ratio ticked down to one basis point (bp) on a monthly term to 1.57% due to the household segment, which was down by 3bp, while the business segment upticked by 1bp.

“We expect GIL ratio to creep upwards, but would not be overly concerned as banks have made heavy preemptive provisioning in FY20 and we reckon credit risk has been passably priced in by the market, looking at the elevated net credit cost assumption used for FY21 by both us and consensus (above the normalised run-rate but below FY20’s level),” Chan noted.

He said the government and BNM will remain supportive in helping troubled borrowers, limiting a significant deterioration in the GIL ratio.

HLIB favoured Public Bank Bhd with a target price (TP) of RM4.50 for its defensive qualities in uncertain times and Malayan Banking Bhd (TP: RM9.40) for its superior yield over CIMB Bank Bhd (TP: RM4.60).

For mid-sized banks, the research house preferred RHB Bank Bhd (TP: RM6.85) more than AMMB Holdings Bhd (TP: RM2.85) as the former has a higher common equity tier-1 ratio and larger fair value through other comprehensive income reserve to buffer against volatile yield curve.

For small banks, HLIB preferred Bank Islam Malaysia Bhd TP: RM5.20) and Affin Bank Bhd (TP: RM2.15) over Alliance Bank Malaysia Bhd (TP: RM2.80) for their positive long-term structural growth drivers and better asset quality.

It noted that Alliance Bank has value unlocking potential.