Bank credit costs to remain elevated despite end of blanket moratorium

The impact of the announced targeted assistance that follows the end of the blanket moratorium may be significantly lower, but bank credit costs are expected to stay up due to provisions made by banks, says AmInvestment Bank.

The targeted assistance and the end of the blanket moratorium was announced by Prime Minister Muhyiddin Yassin during his address on July 29. The targeted assistance involves the restructuring and rescheduling to assist individual borrowers and companies in the vulnerable segments.

For retail borrowers, the assistance will focus on the unemployed, which will see the moratorium extended by another three months until Dec 31, with any further extension beyond that at the discretion of the individual banks.

For employed individuals who saw cut wages due to Covid-19, assistance will be provided by banks to restructure and reschedule loans for at least six months, lowering the installment amount commensurate with the reduced incomes.

Individual borrowers, SMEs, and entrepreneurs will see assistance in restructuring and rescheduling loans as well, along with the option to seek exemptions until financial conditions have stabilised. Banks are expected to assess the long term viability of businesses beforehand.

Hire purchase loans will also see restructuring and rescheduling for borrowers to the appropriate installment amounts in accordance with the Hire Purchase Act 1967.

“We understand that, for restructurings and reschedulings of loans until June 30 2021, there will be no deterioration in the staging of loan accounts to impaired status. The existing staging of loans under FRS 9 still applies,” said AmInvest analyst Kelvin Ong.

Ong also expects the impact of the targeted assistance to be significantly lower on banks’ earnings than the modification loss in the second quarter of 2020 from the earlier automatic loan moratorium.

However, the analyst also noted that banks will need to set aside additional provisioning for the loans under the targeted assistance, alongside the provisioning required for changes in macro variables. This is anticipated to cause bank credit costs to remain elevated, according to Ong.

“There remains pressure on interest margins in the second half of 2020 as we expect another OPR cut to reduce the benchmark interest rate to 1.50%. We are also concerned about upticks in impairments of loans after the moratorium,” said Ong.

AmInvest remains neutral on the banking sector following the announcement of the targeted assistance, with buy calls on Malayan Banking Bhd and RHB Bank Bhd. The fair values are RM8.40 and RM6 respectively.

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