NPLs to rise due to prolonged lockdown despite moratorium relief

by S BIRRUNTHA / pic TMR FILE

MALAYSIA’S announcement of another sweeping loan moratorium will further delay the recognition of non-performing loans (NPLs) of Malaysian banks into 2022 and will likely lengthen the time needed for the banks’ credit cost and profitability to revert to normal, according to Fitch Ratings Inc. 

In a statement yesterday, the rating agency said the opt-in nature of the latest scheme suggests the amount of loans seeking a moratorium will be materially lower than in 2020, but expects the pro-portion to still rise significantly in light of the continued financial strains households and small businesses face due to a prolonged lockdown. 

Fitch added that this echoes the first six-month moratorium implemented for the same borrower segments from April to Sept 2020, except they will now have to apply for the deferral, but approvals will be unconditional and automatic. 

“Loans under relief among the six largest banks accounted for an estimated 12% of aggregate loans at the end of the first quarter of 2021 (1Q21), down from a peak of about 57% in mid-2020. 

“The opt-in nature of the latest scheme suggests that the amount of loans seeking moratorium will be materially lower than in 2020, but we expect the proportion to still rise significantly in light of the continued financial strains households and small businesses face from a prolonged lockdown,” it noted. 

Fitch stated that the new moratorium will delay the peak in NPL ratios to later in 2022 than the rating agency previously expected. 

It added that borrowers will benefit from both the payment holiday and from additional fiscal transfers and pension fund withdrawals. 

“We have thus revised our projection of the banking system’s NPL ratio to rise only marginally by end-2021, from 1.6% as of May 2021, and we now expect it to peak at below 2.5%,” it added. 

Fitch said the moratorium’s temporary suppression of NPL ratios until at least 1Q22 suggests loan-loss allowances to impaired loans are becoming less accurate indicators of the banks’ loss-absorption buffers in the interim. 

It said allowances as a percentage of loans have become more relevant, rising to 1.8% for the banking system by May 2021 from 1.2% at end-2019. 

“Assessments of the banks’ resiliency will also continue to take into account the different collateralisation inherent in the banks’ lending models,” it added. 

Additionally, Fitch stated NPLs may stay low in 2021 with problematic retail and micro, small and medium enterprises’ loans not falling due until 2022. 

It believes the banks’ expected credit loss models will continue to include higher macroeconomic variables and management overlays to account for the elevated uncertainty, which means credit cost will remain high in 2021 and 2022, albeit lower than 2020’s levels. 

It added that reduced visibility of customers’ financial health and repayment behaviour may also give rise to heightened caution among the banks and lower their appetite for loan growth.