Deloitte: Banks’ NPL ratio will rise once repayment aid ends


MALAYSIAN banks could see a spike in non-performing loans (NPLs) once the moratorium and targeted repayment assistance to borrowers expire.

Deloitte Malaysia restructuring services leader Khoo Siew Kiat said local banks remain well capitalised with low NPL levels and credit costs, and have sufficient capital buffers despite the pandemic which had caused Bank Negara Malaysia to maintain its Overnight Policy Rate at 1.75% since July last year and compressed interest incomes for banks.

He noted that the NPL ratio will increase once the assistance ends, mainly driven by pressure on small and medium enterprises and retail customers.

“The risk of higher loan defaults puts further pressure on the profitability of banks. Although Malaysian banks have made additional loan loss provisions to deal with deteriorating loan asset quality, the full extent of the consequences of the pandemic-induced credit risk has yet to emerge,” he noted in a statement yesterday.

To ensure lenders can stay ahead of peers and on track for recovery, he said banks can reduce headline NPL ratio by conducting a portfolio sale.

Non-core asset portfolio disposals would free up capital to be deployed to other more profitable business units that could thrive post pandemic.

“Mature markets such as in Europe have seen portfolio sales as a successful tool to deleverage their balance sheets, with more than US$850 billion (RM3.54 trillion) portfolio transactions over the last five years.

“However in Malaysia, NPL sales have been sporadic over the past couple of years, in comparison to our neighbouring countries due to the stringent requirements and approvals required by the central bank, before a transaction can be completed,” he said.

Banks can prepare for portfolio sales by conducting data integrity checks, data preparation and remediation, loan portfolio diagnostics and indicative pricing exercises as it waits for the central bank to relook into NPL guidelines.

He noted that the need for banks to update internal risk assessment and mitigation models is vital now, and is the reason the lenders should conduct strategic asset quality reviews which can lead to opportunities arising from liquidity and working capital shortfalls of customers.

Banks also need to identify mitigating actions to optimise its balance sheets, such as identification of short- to medium-term capital-accretive actions and proactive outreach strategy to key stakeholders.

“Despite regulatory forbearance, capital ratios are expected to deteriorate due to credit quality reductions, risk-weighted asset increases, and profit and loss losses.

“This can result in relative under-performers being penalised by the market and agencies,” he said.

He said previous crises showed that running a focused non-core asset management unit has proven successful in assisting banks to navigate through the challenges.

It has become a popular approach globally as it allows existing management to focus on core activities while providing the right skills and resources to develop an appropriate strategy for non-core activities.

“Separating good and bad assets of the bank is key when managing non-core assets. Banks must decide if the ‘good bank’ and ‘bad bank’ can be separated in-house or through full legal separation such as a ‘bad bank’ setup, typically structured as asset management companies or special-purpose vehicles,” said Khoo.

Khoo added that banks may consider developing or executing “derisking programmes” to reinforce its balance sheet and capital base as surges in non-core and non-productive assets lead to larger capital burden.