Potential interest waiver to impact banks’ modification losses

The total impact is estimated at RM1.21b which is 5% of banks’ earnings for 2021, an analyst says 


THE government’s move to consider providing a three-month interest exemption for the bottom 50% (B50) income earners under loan moratorium may lead to a rise in modification losses. 

CLSA research analyst Peter Kong said based on a Bank Negara Malaysia’s Financial Stability Report for the second half of 2020 (2H20), 38% of household debt is held by those earning RM5,000 and below, a proxy to the B40, which represents 22% of loans. 

He noted that based on crudely estimated B40 loans in the system and that if the proportion of them taking the moratorium is 33% (high end of CLSA’s range for consumer loans in moratorium in our coverage), the total impact is estimated at RM1.21 billion of modification losses. 

“This is 5% of earnings in 2021 for the banks we cover, and slightly lower than the RM1.65 billion net modification losses recorded in 2020, though it will vary by B40 borrowers in each bank,” he said in a note yesterday. 

He said the move will cause harm to borrowers as this feed into a mentality that non-repayment of loans would be acceptable as policy will always side with them. 

“It would be metaphorically hurting the golden goose that lays eggs if the sweeping and onerous nature of the policies for the B40 make them potentially higher risk in banks’ eyes, reducing the propensity to lend to this group,” he said on the harm towards the lenders. 

The government’s deal with the Pakatan Harapan opposition includes the possible exemption. 

Bank stocks came under selling pressure yesterday with Hong Leong Bank Bhd, Hong Leong Financial Group Bhd, AMMB Holdings Bhd, Public Bank Bhd, CIMB Group Holdings Bhd all falling as the Financial Index fell 1.13% or 173.7 points to 15,199 points on the news. 

The selling of banking stock dragged the benchmark index, FTSE Bursa Malaysia KLCI, down 14.6 point or 0.93% lower at 1,573-point for the day. 

Kong added that further help to borrowers has to be more selective as banks have been stabilising applicants for moratorium where aid is being channelled to where it is needed. 

As details of the waiver are still unclear, he noted that exemption on the deferred portion of the loan would naturally be less hurtful to banks but if its leaning towards a waiver on outstanding loans as it is more advantageous to borrowers. 

“We await the announced outcome and allow banks to distil the impact and/or provide some pushback. Our sector positive outlook is not anchored to short-term alleviation measures though we acknowledge a potential knee-jerk reaction such news may have. 

“Our key ‘Buy’ recommendations are Malayan Banking Bhd (Maybank), Hong Leong Bank and RHB Bank Bhd,” he said. 

Among these three, he said Maybank has the least Malaysia retail loan exposure versus total loans.