B50 loan moratorium interest waiver a negative surprise for banking sector

MANY a time in life, it is not a simple task to satisfy the needs of two different groups with diverse priorities.

This is the case with the Government seeking to facilitate interest payment exemption for those who opt for loan moratorium. Such move will obviously lighten household debt burdens on borrowers as well as provide a temporary boost to consumer spending.

However, this comes as a negative surprise for the banking sector which will have to contend with larger-than-expected modification losses this year.

Concerns over the possible interest rate exemption for loan moratorium repayments – coupled with the possibility of imposing windfall tax – spooked the market for most of yesterday’s (Sept 14) afternoon session.

“Our rough computations point to an average 7% impact to earnings for the banks in our coverage,” projected Maybank IB Research analyst Desmond Ch’ng in a sector update.

“Nevertheless, the banks are well-capitalised and liquidity is ample. Given the one-off nature of the modification losses, we expect a rebound in 2022 earnings for the sector and maintain a ‘positive’ stance.”

To re-cap, the Finance Ministry (MOF) has instructed banks to waive interest on loans under moratorium with immediate effect. This waiver is applicable to borrowers of the lowest 50% income bracket (B50) and will be for a three-month period from October to December 2021.

In comparison, the current moratorium which commenced on July 7 for a six-month duration for all retail borrowers does not entail waiver of interest.

“We expect the modification loss to be larger than initially expected given that the interest waiver seems to be across all B50 consumer loans and not just to auto hire purchase/fixed rate loans as it was during the April-September 2020 loan moratorium,” Maybank IB Research further noted.

“It is not clear what the income bracket is for the B50 group but for reference purposes, loans to retail borrowers earning <RM5.000/month make up on average 35% of total consumer loans and 20% of total group loans for the banks in our coverage.”

Given that details are scarce at the moment, a back-of-the-envelope calculation by the research house estimated that the total modification loss is about RM1.42 bil for the banks in its coverage versus RM1.35 bil back in 2020, hence an average 7% impact to the sector’s earnings this year.

“A point to note is that the modification loss is one-off in nature and it will be clawed back in future years over the life of the loans,” reckoned Maybank IB Research. “There is ample liquidity in the system and the banks are well-capitalised. We expect earnings to rebound in 2022 in the absence of such mod losses.” – Sept 15, 2021

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