AMINVESTMENT Bank Bhd has maintained a neutral call on the banking sector premised on headwinds to interest income from potentially further rate cuts and higher credit cost from influences such as Covid-19 and lower oil prices, as well as domestic political uncertainties.
In a research note today, the investment bank said the six-month automatic moratorium for consumers and small and medium enterprises to defer repayments will continue, with interest to be accrued for the period, not compounded, and must be repaid from Oct 1, 2020 to ease the cash flows of borrowers impacted by Covid-19 pandemic.
For borrowers of fixed rate hire purchase (HP) and Islamic loans, it said Bank Negara Malaysia (BNM) had announced additional steps needed to complete the moratorium on April 30 as they were more complex than floating rate loans.
“In order to give legal effect to the moratorium under Hire Purchase Act 1967 and Shariah requirements, borrowers are required to give their confirmation for variation of the terms to the agreements and allow banks to accrue interest for the six-month period.
“Meanwhile, for the other types of loans, banks are able to accrue interest without the need for borrowers’ consent,” AmInvestment said.
Subsequently, after BNM has clarified its stance on fixed rate HP and Islamic loans, it said the Finance Minister requested banks to consider waiving the additional interest charges on these loans.
AmInvestment opined that this could impact the interest income of banks with those with larger portfolios of fixed rate HP and Islamic loans such as Public Bank and Maybank likely to recognise a higher day 1 loss adjustments in the second quarter of 2020.
The day 1 loss adjustments are due to the lower net present value (NPV) of the modified cash flows compared to the NPV of the cash flows when the fixed rate HP and Islamic loans were contracted.
The bank said based on estimates of nine banks under its coverage, should the interest charges be waived for fixed rate HPs and Islamic loans, the additional interest forgone for the sector was estimated to be RM1.3 bil.
“This is based on the assumption that 22.1% of the banks’ loans are fixed rates on average, 80% of the borrowers take up the moratorium, and an average interest rate of 4.0%,” it said.
“The interest foregone based on the projection could impact the sector’s calendarised earnings for 2020 by 5.3%.
“But it is still uncertain for now if the interest charges will be waived, and we believe that banks are still deliberating on this issue with the authorities. Also, it is not known about the percentage of borrowers that will opt out of the moratorium and continue to service their repayments,” AmInvest added. — May 5, 2020, Bernama
