Loan moratorium may affect banks’ earnings

Banks with higher exposure to SMEs and retail loans will be largely affected


THE opt-in loan moratorium under the People’s Protection and Economic Recovery Package (Pemulih) banks’ earnings due to anticipated increase in loan loss provisions and impact on dividend payouts.

Sunway University economist Prof Dr Yeah Kim Leng said although the impact of the loan moratorium on banks is expected to be manageable, earnings will be impacted by the delay in receipt of interest income.

He noted a larger impact will stem from loans becoming delinquent, especially if borrowers are unable to service their debt after the moratorium ends.

“Given the slower-than-expected economic recovery and uncertain transition to the next stage in the National Recovery Plan, where movement and workplace restrictions are further loosened, it is expected that the banks’ earnings will be dampened.

“We will likely see diminished profits due to the anticipated increase in loan loss provisions. The risk of bank losses has ratcheted up but is unlikely to materialise unless the Full Movement Control Order (FMCO) persists and the affected businesses are shut down for more than three months,” he told The Malaysian Reserve.

Yeah noted banks with higher exposure to small and medium enterprises (SMEs) and retail loans will be largely affected, especially those in sectors that require much contact such as hotels, hospitality, food and beverage as well as tourism-related and entertainment sectors.

On Monday, Prime Minister Tan Sri Muhyiddin Yassin announced the initiatives under Pemulih which include the loan moratorium that will be offered to borrowers who apply with the conditions of amended terms set by the banks.

The moratorium will be available to everyone under any income groups, including the micro entrepreneurs.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid projected bank loan growth for the year to be around 4.5% as the moratorium kicks off.

The impacts of the loan moratorium would not be too different from the loan moratorium last year when banks recognised modification losses in their profits and loss statements.

“In this respect, the banks have been extremely prudent in their risk management through various scenario building exercises and stress testing have been regularly done on their balance sheet to help them to understand the risks associated with the moratorium.

“Risks that may impact the capital adequacy and liquidity have been carefully assessed and such exercise is also being closely scrutinised by Bank Negara Malaysia. In a nutshell, the pandemic happens at a time when the banks are in good condition to withstand the shocks,” he said.

MIDF Research VP and head of research Imran Yassin Yusof in a report yesterday, noted the modification loss for the banks will be lower as he does not expect all borrowers to apply for the moratorium.

Provisions may remain elevated as he expects banks to continue to perform with provisions likely to be less compared to last year.

“This is due to the fact the situation now is less uncertain than in calendar year 2020 (CY20) with the vaccination programme accelerating.

“Besides, banks have built strong buffers with almost all banks having a loan loss coverage of over 100%, suggesting less need to increase overlay provisions. We do not expect banks to release any of these provisions yet, but it could be a possibility in CY22,” he said in the note.

CGS-CIMB Securities Sdn Bhd analysts Ivy Ng and Michelle Chia noted that although the stimulus package temporarily mitigates the effect from the extension of Phase One lockdown until year-end, it still lacks a clear roadmap for recovery.

“The loan moratorium, together with the new Employee Provident Fund withdrawals schemes, may not lead to as significant a jump in participation from retail investors (compared to during MCO 1.0 when a similar blanket loan moratorium was granted) due to political concerns and concerns over corporate earnings risks as expectation bars are set higher by market,” they stated in a research note yesterday.