Loans with repayment assistance pose risks to banks’ asset quality
KUALA LUMPUR (March 4): While local banks appear to have a good start this year as loan growth accelerated in January, leading indicators are showing mixed signs that reflect their cautious outlook.
Banking system lending in January 2021 grew at a slightly faster rate of 3.8% year-on-year, down from 3.4% a year ago, according to the latest banking data from Bank Negara Malaysia, driven mainly by the business loans segment, which grew by 1.5% yoy at the end of January against 0.5% yoy at the end of December 2020.
On the other hand, the growth of loans to households rose from 5% yoy at the end of December to 4.9% yoy at the end of January.
Credit applications increased 9.7% year-on-year due to improved household appetite for credit. However, the corporate segment continued to decline, with the contraction widening to 15.7% from 4.5% in December. Loan approvals, meanwhile, fell a further 3.5% from 0.1% in December, on tighter lending to businesses and households.
Asset quality showed some weakness, as the gross impaired loan (GIL) ratio increased four basis points month on month to 1.60%, after the automatic loan deferral ended in September.
“We expect the GIL ratio to increase, but we would not be overly concerned as the banks made a large preemptive provisioning in FY20 and we believe the credit risk has been reasonably taken into account. account by the market, given the high net cost of credit (NCC). assumption used for FY21 by us and by the consensus, “Chan Jit Hoong, research analyst at Hong Leong Investment Bank, recently wrote in a note.
Still, there is a risk that it will deteriorate further, especially as loans backed by repayment assistance pose risks to the quality of assets of Malaysian banks, Moody’s Investors Service said.
In fact, the four largest Malaysian banks – Malayan Banking Bhd, Public Bank Bhd, RHB Bank and CIMB Group Bhd – have each reported an increase in loans with reduced or deferred installments, that is, loans benefiting from a pandemic-related repayment assistance (RA), Moody’s Investors Service wrote in a memo.
The proportion of loans under RA for these banks rose to 13% on average in February from 11% in November 2020, while Hong Leong Bank loans under RA decreased to 7% in January from 8% in November 2020.
“The increase in loans under RA is negative for banks’ credit because a greater proportion of loans is at risk of becoming delinquent when the RA ends on June 30, especially if economic growth remains subdued,” he said. said, adding that the recent lockdown in January exacerbates the risk. asset quality and economic growth in 2021.
RA supports borrowers whose repayment capacity is affected by the disruption of their income due to the pandemic. B40 households and micro-businesses can defer monthly repayments for three months or reduce repayments by 50% for six months as part of the government targeted repayment assistance program announced in November 2020.
MIDF Research Director Imran Yusof said the contribution of targeted repayment assistance to the banks’ total loan portfolio appears manageable for now, as it is well below what was initially expected.
“That said, we’ve seen a slight increase lately, based on data from the banks’ earnings announcement. This affected the retail segment and mainly mortgages, and was probably due to the application of MCO 2.0. However, we see this as a temporary weakness that the banks will need to navigate and we believe this should start to improve, once the economic recovery gathers pace, ”Imran said.
Bank Islam Malaysia Bhd Chief Economist Dr Mohd Afzanizam Abdul Rashid said banks will continue to remain vigilant on the quality of assets by ensuring that the request received is carefully considered in order to get a better idea credit risks, particularly with respect to customers’ ability and willingness to pay their loans.
“It is ultimately the question of bread and butter for the sector. There is no doubt that the cost of borrowing has become cheaper, following a very accommodating monetary policy adopted by the BNM. But it is the responsibility of banking institutions to ensure that every finance contract will continue to function. In that sense, we can expect the credit underwriting standard to be more robust and cover all angles before banks approve funding requests, ”he said.
As loans under RA are not classified as impaired, the formation of NPLs has slowed for most banks, Moody’s noted. In fact, at the end of 2020, the gross bad loan ratios fell in the five banks compared to a year earlier, with the exception of the CIMB Group, whose exposure to the oil and gas sector contributed to a deterioration of the quality of its assets.
However, with the RA set to end in June, the extent of this segment’s migration to non-performing loans will depend on the pace of the economic recovery in the second half of this year, he said.
Nonetheless, Malaysian banks still have strong capitalization and loan loss coverage ratios to cushion losses, Moody’s noted.
On average, he noted that the Common Equity Tier 1 capital ratio of the five banks was stable at around 14.4% at the end of 2020, up from 14.3% a year earlier, while the average loss coverage ratio on loans improved to 148% from 94%, as a result of efforts to anticipate provisions.
“Proactive bank provisioning will prevent a surge in credit costs if, as we expect, asset quality deteriorates this year,” he added.