Loans under repayment aid increase to 27% of banks’ total loans

By ANIS HAZIM / Pic MUHD AMIN NAHARUL

THE six largest Malaysian banks reported loans under repayment assistance related to the coronavirus pandemic increased to an average of 27% of total loans as of July-August 2021 from 12% as of March-May. 

Moody’s Investor Service stated that this is driven by the retail, and small and medium enterprises (SMEs) segments after the central bank expanded the programme to support a wider group of borrowers alongside the extension of a total lockdown in June. 

“Although this will result in a deterioration in banks’ asset quality, we do not expect non-performing loans to increase sharply because most of the applicants are likely to have sufficient financial capacity to repay their debt when the program ends,” Moody’s stated yesterday. 

The six banks were Hong Leong Bank Bhd, Public Bank Bhd (PBB), CIMB Group Holdings Bhd, Malayan Banking Bhd (Maybank), RHB Bank Bhd and AMMB Holdings Bhd (AmBank). 

From July 7, any individuals and SMEs applying for payment deferrals and reductions in instalment payments of loans are automatically approved with no supporting documents required. 

Previously, only households whose income is at the bottom 40% of the population and micro-enterprises received automatic approval. 

Moody’s expects most of the loans under repayment assistance will remain performing when the six-months duration expires. 

“One reason is that, while the large volume of applications in July indicates stressed borrowers may have increased, many borrowers applied for the programme take advantage of its easy requirements and conserve cash, not because they face severe financial difficulty,” it noted. 

The rating agency also noted that a gradual lifting of stringent measures to contain the coronavirus outbreak will support economic growth, resulting in overall improvements in the repayment capacity of borrowers that are currently under stress. 

According to Moody’s, households whose income are at the top 20% of the population have accounted for more than half of retail loans at Ambank, Maybank and RHB. 

“Most of these borrowers withstood stress during the first two lockdowns, given that only a fraction applied for loan repayment assistance at that time. 

“This income group as a whole has less outstanding debt relative to annual income than others, resulting in stronger financial buffers to absorb sharp declines in earnings,” added Moody’s. 

Notably, these households also often have enough financial assets they can use to repay their debt. 

The number of applicants has decreased in August and the banks do not expect it to increase again. 

“Some asset risks remain in the short term. The central bank forecast economic growth to slow in the second half of 2021 and the unemployment rate remained high at 4.8% as of June 2021. 

“An uneven economic recovery will continue to strain some borrowers operating in or working in the sectors affected most severely by the pandemic. 

“Loans that have gone through multiple rounds of assistance are also particularly vulnerable,” noted Moody’s. 

Nonetheless, it expects banks will continue to increase their loan-loss provisions. 

“The six banks’ loan loss reserves, exclu- ding regulatory reserves, increased to 166% of gross impaired loans on average at the end of June 2021 from 106% a year earlier,” Moody’s said. 

The banks however have strong capital buffers to absorb unexpected stress with an average common equity tier one of 14% at the end of June 2021.