Bank’s uncertainty over asset may reverse in 2022: Fitch

by ANIS HAZIM / pic by BLOOMBERG

MALAYSIAN banks remain cautious about new loan origination as uncertainty over asset quality lingers amid a new moratorium round.

Fitch Ratings analysts Willie Tanoto and Priscilla Tjitra said the shift towards lower-risk assets may only start reversing after mid-2022 — when the economic outlook clears and banks have a better grasp of loan-repayment behaviour.

“We see the lower impaired loans peak and the spreading of credit costs over a protracted period amid stronger revenues, alleviating pressure on financial profile scores and viability ratings,” the analysts said in a report today.

The analysts view that the appetite for risks may turn around only by mid-2022.

“An estimated 21% of the six largest banks’ total loans under relief means that we expect banks’ risk appetite to return only when they have a better picture of loan portfolio asset quality, which is unlikely to occur before at least mid-2022,” they further said.

It said that Malaysia’s system loan growth was just 2.9% year-on-year (YoY) in the first nine months of 2021 (9M21), setting 2021 on a course to match 2020’s 3.4% growth (slowest in 20 years).

The deposit growth has also outpaced loan growth for 15 of the last 16 months, which is the longest period it has done since 2008.

“We believe such caution despite ample deposit liquidity reflects banks’ risk aversion, as a long and extensive loan moratorium has hampered visibility on asset quality and curtailed risk appetites,” they said.

Meanwhile, new loan approvals have remained at a low -40% level since the pandemic’s onset compared with nearly 50% before, although there are early signs of green shoots as sentiment recovers.

“Secured retail lending like mortgages and auto finance have made up the bulk of the lending increase since end-2019, with credit cards shrinking 20% due to conversion of balances into lower-cost term loans,” they noted.

Moreover, the dearth of lending growth has caused loans to decline to 59% of system assets by the third quarter of 2021 (3Q21), from 61% in 4Q19.

The system impaired-loan ratio also declined to 1.6% in Sept 2021 which Fitch Ratings expect to hold steady near 1.8% by the end-2021.

Fitch Ratings also expect impaired loans to increase in 2022 as deferral programmes end, but at a measured pace as varying forms of partial targeted, while relief is likely to continue.

Additionally, the loan-loss allowances have risen to 120% of impaired loans and 1.9% of gross loans by end-9M21, as banks buttressed their loss-absorption buffers over the last six quarters.

“We believe credit costs will remain elevated in the face of rising impairments but continue to decline sequentially to put a floor under earnings,” they added.