Banks’ NP will see a negative impact from the interest exemption of 1.6% in FY22F for HLB, AMMB and Alliance Bank

by AMIR AZLAN / Pic by TMR GRAPHIC

BANKS expected to see negative impact from the Financial Management and Resilient Programmed (URUS), an initiative by the government that offers three-month interest exemption and lower instalments to a period of 24-months for borrowers in the bottom 50% (B50) income group.

CGS-CIMB Securities Sdn Bhd analyst Winson Ng said, banks’ net profit (NP) will see a negative impact from the interest exemption of 1.6% in FY22F for Hong Leong Bank Bhd, AMMB Holding Bhd and Alliance Bank Malaysia Bhd, compared to a reduction of 4.1% projected previously.

He added that the research outfit reduced the assumption on the proportion of loans to the B50 borrowers eligible for the three-month interest exemption from 50% to 20%.

“This is because to qualify for the scheme, borrowers will have to prove that they are jobless or suffer at least 50% loss in income, applicants of the scheme will be monitored by AKPK (a debt counselling agency) to ensure that they are indeed in financial distress, and the reopening of Malaysia’s economy would help to reduce the stress on the income of B50 borrowers,” said Ng in the report.

Ng added that the proposal for smaller instalment amounts for up to 24 months and lower interest rate could signal that banks would have to incur additional losses in the calendar year 2022 (CY22)CY23F from the financial assistance extended to borrowers.

“We believe the purpose for the move is to eliminate the compounded interest on the instalments during the three-month period when the B50 borrowers enjoy the int exemption.

“We are not able to estimate the impact from this as it depends on the monthly instalment amount of loans, which is a function of the interest rate and tenure for each loan,” said Ng.

But he added that the impact would not be significant as the reduction in interest rate would not be big and would only be for a small percentage of borrowers. The analyst is also confident that banks will be more rigid in providing the interest exemption to their B50 borrowers which could lower the risk to its net profit forecast for CY21-CY22F.

“As such, our expectation of an earnings recovery in CY21-CY22F, with net profit growth of 15.8% in CY21F and 8.2% in FY22F, is intact.

CGS-CIMB maintained its ‘Overweight’ calls on the banking sector with Hong Leong Bank Bhd (HLB) with a target price (TP) RM20.78, Malayan Banking Bank Bhd (Maybank) (TP: RM9.10) and Public Bank Bhd (TP: RM4.80).

Winson explained, HLB is an ‘Add’ as they see earnings catalyst in FY6/22F from above-industry loan growth, a decline in loan loss provisioning and strong expansion in associate contribution from Bank of Chengdu.

“We retain our ‘Add’ call on Maybank as we expect a recovery in its core EPS growth to 9.2% in FY21F and 3.8% in FY22F. Public Bank is our top pick for the sector as we believe it is the most defensive against the credit risks arising from the Covid-19 pandemic. This is supported by its strong track record, with its gross impaired loan ratio consistently the lowest in the sector.