BANK Negara Malaysia (BNM) has issued new Covid-19 related directives to banks including the granting of automatic six-month moratoriums on loans (excluding credit cards) extended to individuals and small and medium enterprises (SME) beginning April. This represents around 71% of banking system loans.
According to AllianceDBS Research, to ensure that the moratoriums do not disrupt the banking sector, some requirements would be relaxed. Notably, the net stable funding ratio (NFSR) compliance (effective July) will be lowered to 80% until September 2021.
“Overall, this helps address the uncertainty associated with earnings and asset quality arising from the Covid-19 (and movement restriction order) fallout. Like the previously approved Covid-19 related moratoriums, these loans are unlikely to be classified as impaired and translate to higher provisions (unless demonstrably compromised). Earnings should not be significantly impacted as interest income still accrues with little requirement for higher provisioning,” said AllianceDBS.
It does not discount the possibility of further policy rate action to support the economy, which would be detrimental to banks’ margins given the flagging credit demand. The research firm’s top picks are Hong Leong Bank Bhd and Public Bank Bhd.
The research house added that although moratoriums for corporate loans would also be considered to preserve jobs, it maintained that slowing economic growth and depressed oil prices still pose risks for banks with sizeable wholesale exposures.
TA Research said the additional measures will focus on upholding asset quality and liquidity in the system as well as ensuring the financial institutions have sufficient capital to weather through the challenges ahead.
Additionally, all these loans granted moratorium would not be reported as rescheduled and restructured (R&R) while the R&R loans need not be classified as credit-impaired.
During this period, banking institutions will be allowed to draw down on the capital conservation buffer of 2.5% (which TA Research estimated could release some RM5 bil into the system), operate below the minimum liquidity coverage ratio (LCR) of 100%, and reduce the regulatory reserves held against expected losses to 0%.
Banking institutions will be given sufficient time to rebuild their buffers after Dec 31, 2020.
“In addition to the Statutory Reserve Requirement reduction last week, we believe that these measures would provide sufficient capital and liquidity buffers in the system, thus helping banks to better manage funding cost, now that banks would be less inclined to compete for deposits and look to the market to raise capital,” said TA Research.
It has an underweight call on the banking sector as it does not expect these measures to have any significant impact on the net interest income, and hence earnings of the banks under its coverage. Meanwhile, the reduction of regulatory reserves should help lift the Common Equity Tier ratio.
It said these additional pre-emptive measures would help temporarily ease the burden of the rakyat as well as provide banks with sufficient capital and cushion the impact from a potential liquidity tightening scenario due to rising asset quality risks.
While BNM had also eased the requirements for lending to the broad property sector and for the purchase of shares and units for unit trust funds as outlined in these measures, TA Research believed demand will remain weak, at this juncture.
As such, the research house continued to foresee more downside risks in earnings, as top line growth remains affected by overall weak sentiments and rising macro uncertainties driven by risks of a protracted trade war, coronavirus outbreak, domestic political turmoil and concerns over weakening oil prices. – March 25, 2020
